Look Out for a Big Change in GDP Calculations
BY Erik Sherman
New standards require adding R&D and intellectual property spending to GDP calculations. Here's how the change will affect strategic planning.
By early August, I can confidently predict that U.S. GDP will take a jump. A big one. It's going to shoot up on the order of 3 percent, because the U.S. Commerce Bureau of Economic Analysis will change a key part of the GDP definition. It's about time, but business owners and managers will have to be particularly careful in the short term with strategic planning that relies on economic data.
A large part of the growth will be due to R&D expenses that, in the past, were treated as pure business costs. According to the BEA:
Currently, we count spending on R&D and on the creation of entertainment, literary, and artistic originals as intermediate inputs used up during the production of other goods and services. As a result, the contribution of these important innovative activities to economic growth and productivity is difficult to measure. Right now, these investments don't show up directly in GDP, although sales of drugs and copies of DVDs, CDs, Blu-ray discs and digital downloads are counted.
GDP will soar in small states that host a lot of military R&D, but barely change in others, widening measured income gaps across the US. R&D is expected to boost the GDP of New Mexico by 10 per cent and Maryland by 6 per cent while Louisiana will see an increase of just 0.6 per cent.
Why should you care? Because this change is going to shake up perception of the economic status of the U.S. and individual states. That will mean some careful considerations when making strategic decisions.
Although the BEA will rework all its estimates going back to 1929 in order to keep comparisons as valid as possible, relatively few countries have implemented this new international GDP standard and definition. In the near future, comparing different markets will mean being sure that you're using the same basis of calculation.
The change will also affect many other numbers you might have come to depend on. Corporate profits? Inflate rates as calculated by the Federal Reserve? What causes economic growth? All are, to one degree or another, up in the air, and with them, many strategic plans.