NCPA - National Center for Policy Analysis

Output Figures May Understate Growth

July 23, 1997

Economists are having a difficult time reconciling today's low unemployment rates in the U.S. with persistently low rates of inflation. Some of them are beginning to cast a suspicious eye at gross domestic product (GDP) numbers.

  • Some analysts expect that when the government releases revised GDP numbers next week, they will show the economy has been forging ahead nearly a full percentage point faster than previously thought.
  • GDP figures are mostly arrived at by totaling retail sales and inventories, and should match gross domestic income -- the sum of wages, salaries, profits, dividends and other income the economy generates.
  • But the two haven't matched since 1993 -- with income growing $178 billion more than GDP since then.
  • During the last two years alone, income has soared at a 3.7 percent annual rate after inflation, compared to the official GDP's 2.9 percent growth rate.

On July 31 the Commerce Department releases its regular annual revisions of both numbers. While Commerce swears by the GDP's accuracy, many analysts now believe the income report is more trustworthy.

The GDP measure of output has been rising a scant 1 percent per year for the past two years, as has productivity. But an upward GDP revision would explain why rising wage costs aren't being passed along to consumers in the form of higher prices. It would also explain where corporate profits have been coming from: increasing productivity through improved efficiency.

Moreover, if growth has been faster than thought, then consumer spending has been more lavish than thought. Economists have been looking for the so-called "wealth effect" -- believing that a booming stock market should be inspiring consumers to spend more money.

Source: Christina Duff, "New GDP Data May Solve Some Riddles," Wall Street Journal, July 23, 1997.


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