Jeremy Schwartz, CFA, Director of Research, WisdomTree Asset Management
During a recent “Behind the Markets” podcast, we spoke with Leonard Nakamura, an economist at the Federal Reserve (Fed) Bank of Philadelphia and a former professor at the Wharton School.
Inflation and Growth Mismeasurement
Nakamura’s research focuses on mismeasurements in the official gross domestic product (GDP) statistics. Nakamura started off the conversation talking about estimates—and he fully cautioned that these estimates have a very wide standard error and uncertainty associated with them.
He said that we may be mismeasuring real economic growth by as much as 2%. And in his opinion, this mismeasurement alone essentially would be a doubling of the reported GDP statistics.
He also can see how we may be “overcounting” inflation by as much as 2% a year—or we may have more declining prices (deflation) than we realize. Both are very large numbers relative to the reported statistics. Here are some of the calculation examples he provided:
- We have gone from a “widget-driven” economy to a “digit-driven” economy. Digital information has been growing at roughly 60% per year, but this amount of “digital growth” is only 1% of personal consumption expenditures. Yet in GDP accounts, we’ve had nearly zero real growth in telecommunication output, showing that there are real problems measuring the growth in this output. The reason, in his opinion: the way the statisticians meter measure telecommunications output is the number of minutes spent on phone calls—yet all the other digital transfer information has exploded higher.
- Health care: Our doctors are better trained and have more knowledge, yet their contribution to GDP is essentially measured by the time spent with a patient. Therefore, a hospital stay that used to take seven days but now only takes one day shows up as declining GDP, even though the same outcome was achieved with a dramatic increase in productivity. There was some conversation about the proper classification of this as either being in the consumption component of GDP or the investment component, and in a general sense, health care was more an investment rather than consumption—and education is in a similar situation.
- Nakamura was also careful to emphasize that he does not believe this is the fault of our agencies doing the calculations. He thinks the U.S. has the best statistical agencies in the world, and some of the global slowdown in productivity that we see in the U.S. is a global phenomenon, suggesting some of the mismeasurements happening are percolating globally.
Versions of this article first appeared on SeekingAlpha and the WisdomTree blog on September 11-12, 2018.
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About the Author: Jeremy Schwartz, CFA, Director of Research, WisdomTree Asset Management is responsible for the WisdomTree equity index construction process and oversees research across the WisdomTree family. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel’s head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” Jeremy is a graduate of The Wharton School of the University of Pennsylvania and currently stays involved with Wharton by hosting the Wharton Business Radio program “Behind the Markets” on SiriusXM 111.