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Economic Growth Was Stronger? Over Past Two Years, Gdp May Have Been Underestimated

The Commerce Department is expected to report this week that the U.S. gross domestic product grew faster than previously calculated over the past two years - perhaps by as much as a percentage point.

If so, that could answer a question that’s been puzzling investors, economists and Federal Reserve Chairman Alan Greenspan: How has the nation maintained its rapid rate of growth with nary a sign of inflation?

“Higher measured GDP growth also means higher productivity growth,” said Stephen Slifer, chief U.S. economist at Lehman Brothers in New York. “Not only does it mean that the nation’s growth potential is higher, but with workers so productive, it helps explain why firms have been able to keep prices down in the face of a modest pickup in wages.”

In theory, the country’s GDP, which measures the value of all goods and services, should match the figures the Commerce Department collects on national income - wages, salaries, profits and the like. For some time now, however, national income has been growing faster than output, which means something being sold or stored isn’t being counted.

When the government releases revised GDP figures Thursday - the first revision since 1995, using more detailed and more accurate data - most economists expect the gap will narrow. That would be more good news for the best-performing economy in a generation.

Greenspan himself emphasized the importance of productivity gains to U.S. lawmakers last week during his twice-yearly testimony on the economy. “Whatever the trend in productivity and, by extension, overall sustainable growth, from the Federal Reserve’s point of view, the faster the better,” Greenspan said.

If the revised GDP figures show the economy can expand at a faster rate than earlier thought without triggering higher consumer prices, investors probably will view that as yet another sign the central bankers will leave the overnight bank lending rate unchanged for the time being.

If the GDP numbers are revised higher, it could help explain the missing “wealth effect.” That’s the additional consumer spending economists have been looking for generated by the rising value of stock and bond portfolios.

Current statistics show U.S. income grew 1 percent faster than output over the past two years, said Everett Ehrlich, until recently the Commerce Department’s top economic official. “The problem is, our measurements tell us income is growing a lot faster than output and that can’t be true,” explained Ehrlich.

Tags: business