This morning BEA released their advanced estimate of the U.S. GDP for the 1st quarter of 2013. The 2.5% rate of growth was both better than last quarter (0.4%) but less than economists had expected (3.2%). Once again, government spending was a drag as was the trade deficit. On trade, exports rebounded from a drop in the last quarter - but so did imports and at a greater level. Business investment slowed, with investment in equipment and software rising only 3% compared with the 11.8% gain in the 4Q 2012 and investment in business structure actually declining. Investment in information processing equipment and software slowed dramatically, although it was still positive. Investment in industrial equipment and transportation equipment actually dropped.
This general discussion of business investment highlights an ongoing problem with the GDP numbers. The statistics measure investment in various forms of tangible investments: structures, ICT equipment, off-the-shelve software, industrial equipment, transportation equipment and "other" equipment. It does not give us any guidance on investment in intangibles. So we do not know whether companies have increased or decreased their investments in important areas such as knowledge, human and organizational capital.
That is partly going to change soon. As I've also mentioned before, BEA is making a major revision in the GDP calculations later this year. Two of the 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. These changes will occur on July 31 with the release of the advanced estimate of GDP for the 2nd quarter of 2013 and will include revisions going back a number of years (in some cases to 1929). This should allow us to get a better picture of the I-Cubed Economy.
Note: the second estimate of 1Q GDP will be released on May 30. So today's GDP number is still subject to significant later revision.