Measuring Intangibles

The first estimate of US Q2 GDP will released a few hours before the FOMC meeting concludes on Wednesday. Estimates have generally been reduced as data suggest consumers have pulled back and the expected inventory rebuilding did not materialize. Some forward looking indicators point to a better Q3, but with some evidence that activity in the interest rate sensitive sectors has eased, the situation remains fluid.

In addition to the quarterly report, the government will unveil methodological revisions that are expected to boost the size of the US economy by around 3%. Now, many with a penchant for conspiracy are greeting the news with cynicism, but the truth of the matter is that the US is simply among the first to implement new data standards that were part of a 2008 UN agreement. Europe is expected to make similar adjustments next year, for example.

This methodological innovation is to integrate when economists call "intangibles" into the GDP calculation. In particular, expenditures on research and development will be counted as investment. R&D expenditures have become increasingly important and, as a fraction of US business investment, have doubled over the past generation. Other intangibles, such as the expenditures used in creating enduring cultural goods, such as movies and books.  

In many high income economies,  expenditures on intangible assets has grown rapidly and, according to the OECD, matches or even exceeds the investment in traditional tangible assets, such as plant and equipment.   The rise of the service sector and new business models have helped increase the importance of intangible assets.  Growth models are also recognizing that importance of intangible assets in high value-added activities.       

The revisions will go back several decades.  While it will boost the size of the economy, it is not expected to change the pace of growth, which is more important for policy makers and investors.  The last major change in the GDP methodology was back in 2009 when spending on software was included as a category of investment.