The Commerce Department will release today a set of significant revisions in the way it calculates U.S. gross domestic product, which is expected to show that the economy has been growing somewhat faster than previously believed.
The revisions are expected to raise the level of GDP, both before and after adjustment for inflation, and the rates at which both figures have been growing. The upward revisions in inflation-adjusted GDP should also boost the level and rate of increase in U.S. labor productivity--the amount of goods and services produced for each hour worked--but those revisions will come later from the Labor Department, not Commerce.
The most important of the changes coming today involves business and government purchases of computer software, which will now be treated as a capital investment rather than as a current expense. According to a preliminary Commerce estimate, that change, had it been in effect, would have raised the level of 1996 GDP by 1.5 percent, or $115 billion. Since spending for software has continued to rise rapidly since 1996, presumably the impact on more recent GDP figures would be even greater.
In addition to such changes in methodology, today's releases will incorporate updated and more complete recent data on both income and spending and will include the initial estimate for GDP for the July-September period. Many analysts expect the third-quarter GDP estimate to show that the economy grew at an annual rate of about 4 percent, with a few predicting a higher number.
Previously, the Bureau of Economic Analysis, the part of Commerce responsible for GDP and national income figures, has regarded software as what economists call an "intermediate" product, similar to the steel going into an automobile or the paper used in a doctor's office. Neither the steel nor the paper shows up directly in GDP because they are consumed in the process of making the automobile or in providing the doctor's medical services, both of which are part of GDP.
But software isn't consumed in that fashion and it generally remains in use for several years, in much the same fashion as a car or truck bought and used in a business. Instead of such a vehicle being treated as a current expense in the year in which it is bought, its cost is written off over the years of its useful life--a process called depreciation.
Treating software as an investment rather than a current expense has the effect of reducing a business's costs without reducing its production, which raises the firm's profit. At the same time, the business investment portion of GDP is increased by the amount of the software purchase.
Since federal, state and local governments also purchase software, the new treatment means the amount of their investment also will rise, giving a small additional boost to GDP.
A second significant change concerns government employee retirement plans. Until now, contributions to those plans by government employers and employees have been included in the government portion of GDP. Now the government plans will be treated like private plans, and contributions to them will be regarded as private saving.
This change would have added about $120 billion to personal saving in 1996, according to the bureau's preliminary estimates. That would have raised total personal saving that year to nearly $270 billion from less than $160 billion and reduced government saving by the same amount.
While national saving is not affected, the change will have a dramatic impact on the level of personal saving. In 1996, for example, personal saving as a share of personal disposable income--essentially after-tax income--was 2.9 percent. The change would have lifted that to 5 percent.
Since 1996, the personal saving rate has dropped to zero--that is, American households have been spending more than the disposable income they are currently earning and dipping into past saving to do so. Many economists say consumers have been saving so little out of current income because of their increase in wealth due to large gains in the value of stocks they own and in the value of their homes.
Switching the treatment of government employee pension plans won't actually increase the level of personal saving that has been going on, but the key savings-rate figure will be lifted well above the dramatic zero level. On the other hand, pension plan funds generally are not available to potential beneficiaries until they retire and start getting benefits, and therefore may have a limited impact on consumers' current willingness to spend.
The bureau is revising its figures for GDP and national income back to 1929, though only revisions going back to 1959 will be available today.
A third change being made also will raise GDP and lower some of the GDP price indexes for 1978 through 1994. For its various measures of inflation, the bureau relies in part on the consumer price index data provided by the Labor Department. Recently that department altered its method of adding together the changes in prices of many individual items covered by the CPI to make that index more closely resemble a true cost-of-living index. In this case, the shift caused the CPI to rise more slowly.
Since the CPI itself is never revised, the new methodology was applied only prospectively. But the bureau regularly revises its GDP figures, and it had already used the new techniques for its estimates for 1995 to the present. With prices increasing less rapidly, a larger part of each year's rise in current-dollar spending for goods and services meant a greater increase than previously reported for inflation-adjusted GDP.
Among other changes, the bureau also is shifting the base year for calculating inflation-adjusted GDP to 1996 from 1992. That will raise the reported level of inflation-adjusted GDP but not affect figures for economic growth.