What Turns My Head… About GDP

Rodney Johnson | Thursday, October 31, 2013 >>

A great body and a back-end to die for. Those are the things that grab my attention.

From time to time I’ll be driving down the road and my head will turn on a swivel. I’ll exclaim something like: “Wow!” or “Look at that!” or even “Awesome!” and my wife will simply smile.

She doesn’t even have to follow my gaze. She knows what I’m looking at. It’s a car. More specifically, it’s a classic car of some sort.

I’m a sucker for vintage iron, particularly vehicles from the 1920s and the 1960s. I’m not nostalgic for them, as I was neither alive in the ’20s nor a teen in the ’60s, so I’m not trying to relive a prior period of my life.

I just really enjoy the design of these cars. But I don’t own one.

Each time I see such a car I think through the mechanical issues associated with keeping one in working order, and the loss of convenience and performance compared to modern cars. The difference between what passed for modern back then and what we have available today is enormous.

Motor Trend Magazine tested three classic cars – a Challenger, Camaro, and Mustang – against their modern day namesakes and the results were clear. The old cars are less comfortable, sloppy in performance, and sluggish in response to everything but the accelerator.

The superiority of the modern vehicles was obvious all the way round. This explains why such cars captivate many people, me included, but why we don’t drive them daily. It’s simply impractical. When faced with a much better alternative, most everyone will take the obvious choice.

Except the U.S. government…

While no one will ever be nostalgic for a way of measuring economic activity, there’s no question that our current compilation of GDP is ridiculously out of date.

This statistic was developed in the late 1920s and early 1930s to measure a very narrow slice of life – production. This time frame included the start of the Great Depression when business leaders and politicians greatly underestimated the contraction in the economy, so there was a desperate need for better information.

GDP – estimating the change in business spending, consumer spending, government spending, and exports minus imports – fit the bill and was a great advancement in understanding the economy.

The government would gather information on spending over the course of several months, develop an average, compare it to the prior period, and voila! Suddenly we had a yardstick that we could use to measure the growth or contraction of economic activity.

Unfortunately, over the last 80 years we’ve changed woefully little about how we calculate this number.

Yes, the government has tinkered with GDP, adding in a measurement of “rent you could receive if you rented out your home” and other silly things.

Yes, the government makes adjustments for how big of an affect different purchases have on our productivity (new computers add more to the economy than their cost… see if you can figure that one out!).

But in terms of simply measuring numbers, the government waits around for survey results, compiles some averages over an entire calendar quarter, and then revises the number twice over the following two months.

To find out what happened in the first quarter of the year, you have to wait until the last Friday in June for a final, revised number from the U.S. government.

Haven’t they heard of the Internet?

If we can determine iPhone sales in a matter of hours, and Black Friday retail sales within a week, then why does it take three months to develop an average of data from a calendar quarter?

Government hasn’t kept up with the times, and yet GDP is one of those numbers that market watchers and politicians hang their hats on.

We can do better.

Right now companies like Premise, which provides real-time information on price changes in 25 cities, are standing at the front of the information line. There is no reason our hardworking analysts and researchers at the Bureau of Economic Analysis couldn’t get in the same line.

We could actually measure real-time numbers from Corporate America, consumers, and the government (where they have to measure their own spending on a lag… really?!) to let us know what is happening today, not 150 days ago.

This would give us much better data to use when making business and investment decisions, and might even aid in monetary and fiscal decisions, if those areas can be helped at all.

As we move to a more real-time measure, we might also drop those idiotic notions that have been bolted on to GDP as time passed, like the owner’s-equivalent-rent and hedonic adjustments.

Of course, if we did this, then everyone would get a clear picture of what is going on in the economy… and I’m not sure they’d like it.

Until the government makes such changes, I’m sure it’ll keep driving its 1958 Edsel and telling all of us how great it rides.


Rodney

Managing Editor’s Note: Rodney’s talk of getting a clear picture got me wanting to do more to get to know you better. The more of know of you, the better we can serve you. Please take a moment to complete this brief survey. Thanks.

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Categories: Life Cycle

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.