According to government statistics, output in almost every major manufacturing industry expanded between 2001 and 2005. That seems a little surprising since manufacturing employment dropped by more than 2 million jobs over that period, and nonpetroleum imports rose by roughly 35%.
In reality, some of those apparently healthy manufacturing industries are probably suffering from "phantom" gross domestic product. That is, as we show in this week's cover story, miscounting of import prices is causing domestic production to be overestimated, perhaps significantly.
Here are some tips on how to figure out if an industry's output and productivity is being overstated by phantom GDP. They use publicly available import price data and industry productivity data from the Bureau of Labor Statistics (BLS) (www.bls.gov); trade data from the Census Bureau (www.census.gov); and industry output data from the Bureau of Economic Analysis (www.bea.gov). It must be stressed that these signs are not conclusive—but they do point you in the right direction.
Sign 1: Prices of imports are rising, even as offshoring is accelerating.
The main reason why production is moving overseas is cost: It's cheaper. So if the BLS is reporting that the price of imports in your industry is rising—but the imports keep coming—that's a good clue that something is askew with the numbers. For example, reported import prices for furniture have risen by 6.7% since 2003, despite a massive move in the industry to produce goods in China. That's a sign that the industry's output, as measured by the government, is probably overstated.
Sign 2: Products are rapidly replaced by new and improved models.
For consumers, having the latest generation of cell phone or other electronic gadget can be a marvel. But for the folks at the BLS trying to track import prices, it can be a nightmare. The faster new products come out, the more likely the government will miss some of the big price drops. If you are in an industry with rapid product cycles, but reported import prices are not dropping as fast as consumer prices or producer prices in the same industry, that's a sign that phantom GDP is being created. The best example: Televisions, where reported import prices have dropped by 15% over the past three years while retail prices have plummeted by almost triple that amount. That's not very likely.
Sign 3: Back-office operations and other services are being moved to lower-cost countries.
So far we've concentrated on manufacturing and imports of goods—but offshoring of back-office operations and other services can create phantom GDP as well. We don't have good tools to track it, but a very approximate rule of thumb is that when a service is first offshored, it will create phantom GDP equal to about one-half the cost savings. (Phantom GDP, as described in the cover story, arises when cost cuts and productivity improvements outside the country are mistakenly booked as coming from domestic production.)
Sign 4: Sharp increases in reported productivity and output coincide with increases in imports
It's often said that competitive pressure from imports can cause U.S. companies to become more productive themselves. Sometimes that's true—but an apparent increase in productivity and output in an industry can also be the result of imports being incorrectly counted as domestic production. So check to see if the apparent good news in the industry happened in the same year as imports jumped.
Good luck in your phantom GDP hunting, and let me know what you find at my blog, Economics Unbound. By Michael Mandel