R&D: Revision & Definition
5 August 2013Asset managementNo doubt there will be some conspiracy-minded commentatorsout there who will claim that the announcement last weekthat the US economy was actually 3.4% larger than previouslythought was the government fiddling the books. In fact, itwould be better described as the government correcting thebooks. Previously excluded intangible assets, such as spendingon research and development (R&D), are now being countedas part of GDP. Ask any business owner and they will tell youthat R&D is an investment: spend money today on R&D andif successful you will be able to produce more products moreefficiently in the future. How is that different from investing ina machine (which has always counted towards GDP)?The conspiracy theorists will point to the convenient outcomethat the revisions make the recession shallower and therecovery stronger (chart 1). Look into the detail, however,and it turns out that the greater strength of the recoveryhas almost nothing to do with the reclassification of R&D.The change is the result of the usual annual revisions thatare made as more data comes in from more detailed annualand quarterly surveys. Sometimes those revise up (such as in
2013 and 2012), and sometimes they revise down (such as in
2010 and 2011).For such a widely used and recognised statistic, the amountof knowledge about what GDP is and how it is calculatedis minimal outside of the rather geeky world of economists.Even in the financial world there are many misconceptions.So to explain the changes, let’s start with the basics: thecommonly used expenditure approach to GDP attempts tomeasure final expenditure in the economy. The expendituremust be final because otherwise there would be doublecounting. Suppose if instead of final expenditure, we countedup all transactions. Company A buys glass from company Bto put into a mirror and then company A sells that mirror toa consumer. If we counted transactions that glass would bedouble counted. To complicate things further, the transactioncounting approach would also suggest that our economybecame smaller if company A switched to making its ownglass, simply because that first transaction would no longerbe registered because it occurred within the company.
Senior Fixed Income EconomistUBS Global Asset Management firstname.lastname@example.org
Fixed Income EconomistUBS Global Asset Managementgianluca.email@example.com
Source: Bureau of Economic Analysis
Chart 1: Rising aer dipping
US GDP relative to pre-crisis peak set to 100, by vintage
The US economy is 3.4% larger than previously thought,due to revisions to how GDP is calculated. Previouslyexcluded intangible assets, such as spending on researchand development, are now counted as part of GDP.The US is one of the first countries to implement thesechanges and other countries may follow suit in the nextfew years. But what changes if GDP is suddenly higher?Nobody is richer, and while ratios such as debt to GDP
will need to be re-estimated, financial outcomes in thereal world do not change.