Tomorrow lunchtime, before the release of the evening’s much anticipated FOMC policy statement, the Bureau of Economic Analysis (BEA) will release America’s GDP figure for Q2. The consensus is that the US economy will have grown by 1% in the last quarter. However, interestingly, the nominal figure for output is likely to expand by between 2.5% and 3%.
Now this may sound like another bureaucratic, sneaky sleight of hand to bedazzle a confused public into believing that all is well, growth is real and things are picking up but, in this instance, the change looks justified and, indeed, quite positive. In short the BEA is going to revise its methodology for calculating GDP to include intangible assets for the first time. This will mean that items such as R&D expenditure and “artistic originals” (e.g. television series or music productions) will be treated as investment rather than expense. Given the real value such items can generate in an economy it seems a sensible step to recognise their contribution in the headline figures.
The cynical out there will no doubt claim this technicality is designed to give the US economy a false boost, but this would be unfair. In fact, America is just the first nation to implement the new data standards agreed as part of a 2008 UN settlement. It is expected that Europe will make similar adjustments next year (behind as ever!).
This will be the most major change in US GDP reporting since 1999 when spending on software also became a form of capital expenditure. In many ways it is a sign that economic data gatherers are finally moving with the times. Spending on “intangible assets” has grown dramatically in most advanced economies over the last two decades as consumer consumption has increased, the service sector has grown and more and more knowledge based products and businesses have come to market. Very few would doubt the importance of intellectual property to the economy so surely the process of its creation is value generative?
It will be interesting to see how the media reacts to the new figures, but I can imagine the response. Initial projections suggest that $400billion will be added to the total value of the US economy. The likely headlines are all too predictable; “America adds the equivalent of South Africa to its economy” and so on.
Unfortunately this data release is not likely to provide much of a trading opportunity. Although the nominal value of the US economy will increase fairly notably, the underlying growth rate is not likely to change. The BEA is going to backdate the new methodology to 1929, so while tomorrow’s report might take a little longer to digest than normal after that normal service should resume. As ever, the key figure to watch for will be the percentage increase (or, heaven forbid, decrease) America experienced between April and June.
Then comes the Fed…