Critics: GDP fails ‘commonsense sniff test’

updated 3:45 p.m. ET Sept. 9, 2008

NEW YORK - It was a rare bit of stellar economic news. The Commerce Department revised Gross Domestic Product upward last month, saying the broad measure of the economy grew at an annual rate of 3.3 percent for the second quarter, up from an initial estimate of 1.9 percent.

One problem: A vocal group of analysts and economists isn't buying it.

"Quite frankly, we do not think the report passes the economic commonsense sniff test," wrote economists John Ryding and Conrad DeQuadros at RDQ Economics.

GDP measures the market value of everything produced by labor, plants and properties in the U.S. — a total of $14.3 trillion for the second quarter. The government agency charged with calculating the first estimate of each quarter's GDP has less time to do so than a ten-branch bank has to file an earnings report.

GDP is a crucial variable in setting monetary policy, such as short-term interest rates, but critics say the effort to gather and calculate the data is underfunded, hobbled by government agency infighting and overly reliant on assumptions.

Criticisms of second-quarter GDP were more granular. Disbelievers say it was skewed by some of the conventions that make it consistent from one quarter to the next and strip out foreign inflation.

Calculating GDP is unwieldy
The first problem with calculating GDP is how unwieldy it is.

GDP is supposed to be a summary of the domestic economy. So a $30 copay to a West Virginia internist, a $3,000 rental payment for a Cleveland office and a $30 million shipment of U.S.-built backhoes from the Port of Los Angeles are all supposed to be baked in.

So are haircuts, tuition payments, employer's payments for benefits, each shopping spree by a British tourist in New York City and every penny spent domestically by the government — whether an Indiana dog catcher fills up a town truck with diesel or the Navy orders a U.S.-made aircraft carrier.

The next problem with government data is where it comes from.

Consider incomes. Because of privacy concerns and interagency tussles, it is illegal for the Internal Revenue Service to share personal income data with the Bureau of Economic Analysis, which calculates GDP, until that data is three years old. That's one reason the BEA estimates personal income.

Data that are estimated on the first read of GDP include important components — trade and inventories, said Diane Swonk chief economist at Mesirow Financial. Big swings, such as last month's revision, come as more reliable data arrives.

Still, some of those "more reliable" numbers remain questionable.

"I've never been convinced they're very good at measuring inventories," said David Wyss, chief economist at Standard & Poor's. "My father was treasurer of a small company and I asked him how he filled out the inventory forms. He said, 'I don't know. I just toss them over to my secretary.' Gives you great faith in the data."

Now add funding issues to the brew.

Half the government's spending on economic data is dedicated to agriculture, a quarter to manufacturing, and only a quarter to the service sector, even though services make up 80 percent of the U.S. economy, Wyss said.

The government simply needs to spend more, Swonk said.

MORE FROM STOCKS & ECONOMY

Stocks & economy Section Front

Traders ask ‘What Dubai?’ — stocks end higher Bleak job scene poses challenge Economic reports hint at modest growth Manufacturing activity rises for 4th month Construction spending edges up slightly Blacks fear path to middle class blocked Auto loan delinquency rate edges higher Answer Desk: Repairing consumer credit  Jobless face expiration of health benefit Oil prices up after China manufacturing report Stocks & economy Section Front   Add Stocks & economy headlines to your news reader: