With the flick of a pen, the GNP gets a boost U.S. revises calculations and rewrites history

October 01, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK -- Depressed about the wave of negative economic statistics underscoring the recent recession? Look again. They might be getting better.

A broad revision of history will emerge next month when the Commerce Department officially shifts its method for calculating gross national product -- the core statistic used by most people to suggest the direction of the economy. Under the new methodology, the economy suffered a wallop last Christmas and has since been on an upswing. GNP for the second quarter, officially reported as a 0.5 percent decline last week, actually rose 0.4 per cent under the soon-to-be official statistics (unless it is revised yet again).

The change comes as the result of how the Commerce Department adjusts for inflation, a technical kind of maneuver ordinarily of interest more to statisticians than individuals worried about the current financial crunch. Since 1985, the Commerce Department has adjusted prices for the thousands of items and transactions included in the GNP back to a base year of 1982. Now, the base will shift to 1987.

That small alteration will have a large impact on how different facets of the economy are weighted, and thus how healthy the economy appears. In particular, computers, which dramatically declined in price during the mid-1980s, will become far less significant. Merely recalculating their impact using the new methodology eliminated a multibillion weight on the economy's performance this spring and helped nudge the final result into the black.

More broadly, the revisions will reconfigure how thousands of other items are perceived to affect economic activity. The new perception could undermine many of the forecasts issued by prominent analysts.

Robert Eggert, publisher of Blue Chip Economic Indicators, has postponed his annual award for the best forecaster until the very end of the year, when the revisions are complete. "It would be disastrous if we gave the award," only to find that the winner was revised into a loser, he said.

To be sure, the economy is far from strong based on either set of data. While the 0.9 percent difference between measures is extremely significant if sustained over time, as a measure of quarter-to-quarter change it might merely be a statistical aberration. And further revision to the GNP would hardly be a surprise; it is often recalculated as better information becomes available.

Indeed, the half-dozen economists who periodically get together date the official beginnings and ends of recession don't even use GNP in their deliberations, instead relying on narrower gauges such as employment, personal income, industrial production and final retail sales.

They last met in April to declare the recession had begun in July 1990. More recently, the benchmarks they use remain too mixed for any firm conclusion that a recovery has begun. "No one has breathed a word about a meeting," said Robert Gordon, a Northwestern University professor who is on the committee.

Still, even if the GNP is widely faulted, it provides a fast summary. Often, recessions aren't officially declared to have begun until after they end. And importantly, the way most businesses measure a recession remains two consecutive declines in the quarterly GNP number. As a result, any change showing a swing could have an important impact on confidence, nothing else.

Moreover, the changes should enhance the accuracy of the information. "Clearly, for the purposes of evaluating the economy, you want the base year as close as possible to the present," Mr. Gordon said.

Conversely, the most negative facet of the change may be its impact on the distant past. Concurrent with the revision in how new numbers are calculated, the Commerce Department will recalculate GNP in prior years. That, Mr. Gordon said, will likely lead to the misstating of economic events decades ago. To cite only one example, he noted that the government's presence in the economy has swelled in recent years, and that will now have a retroactive effect on major historical occurrences.

"I joke that each time they do this, they just make World War I a larger war," Mr. Gordon said.

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