3rd quarter economic growth revised upwards

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BEA's "second estimate" of the 3rd quarter GDP showed stronger economic growth than previously thought. The GDP growth was revised upwards to 2.7%, from the previous estimate of 2%. That is still weaker than many had hoped for. The Federal Reserve's "Beige Book" economic survey also released today indicates "economic activity generally expanded modestly since the last report."

Greater exports and private inventory investment account for the upward revision. Business investment building was significantly revised upward. However, investment in information processing equipment and software was revised downward.

As I have noted before, the data has a basic problem in that it does not give us any guidance on investment in intangibles other than software. So we do not know whether companies have increased or decreased their investments in important areas such as human and organizational capital.

As I've also mentioned before, BEA has plans for a major revision in the GDP calculations next year. Two big changes will help make the GDP data more accurate: capitalization of research and development (R&D)and capitalization of entertainment, literary, and artistic originals (movies, music, books, art work, etc.) Currently, both R&D and the cost of creating entertainment, literary, and artistic originals are treated as a direct expense. Under the new system, they will be treated as investments, as they should be since they have long paybacks not just immediate returns.

As part of this shift, investments in these items will be specifically captured in the nonresidential fixed investment data. There will be separate data for software (now a subcategory of equipment), R&D, and entertainment, literary, and artistic originals. This should allow us to get a better picture of the I-Cubed Economy.

Note: the third estimate (what used to be called the "final") will be released on December 20. The GDP number is still subject to later revision.


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