2002 Economic Report of the President Differences

¶ … 2002 Economic Report of the President

Differences in Structural TFP

The President's Economic Report (the "Report") claims that "structural labor productivity growth and TFP ("Total Factor Productivity") growth remained strong through 2001. This growth argues that the New Economy remains alive and well." See the Report, at 60-61.

The structural TFP growth differed between the time periods of 1973-1995 and 1995-2001. ("TFP growth" is defined as "the increase in aggregate output over and above that due to increases in capital or labor inputs." Ibid.)

There are several reasons for this difference.

First, investments in information technologies added 0.60% to the increase in structural productivity growth after 1995.

Second, "the rate of growth of TFP in computer-producing industries" rose ("as evidenced by the rapid decline in computer prices.")

Finally, the change "captures the extent to which technological change and other business and workplace improvements outside the computer-producing industries have boosted productivity growth since 1995." Ibid.

But it is unclear whether this productivity growth is sustainable. Widespread unemployment and dips in the labor market will continue to pull down the productivity factor.

Furthermore, emtrepreneurial activity is likely to slow down, as cautious business people opt to stay in the traditional workforce rather than venture out into a risky economy.

And as the United States prepares for War in the Middle East, trade barriers are likely to ensue and cross-border trading is likely to falter.

Because trading generally increases the productivity of the United States, a dip in trade is also likely to cause a slip in productivity.

II. Components of Actual Growth of Real GDP

There were changes in the key components of actual growth of real GDP, as shown in the Report. (Table 1-1 (p.53); Table 1-2 (p. 55); Chart 1-1 (p.24)). "A key component of the revision came from revised data on gross private domestic investment, initially estimated to have risen 3.2% but later revised to show a contraction of 2.8%. Such revisions lead to uncertainty for both government and private decisionmakers, which can cause costly delays." Report, at 24.

Another change in the key components of actual growth of real GDP was caused by inconsistencies in statistics. For example, there has lately been a general discrepancy in Gross Domestic Product and Gross Domestic Income.

GDP and GDI usually, "are theoretically equal. Because of statistical discrepancies, there has always been some divergence between these two reported numbers. However, this discrepancy has been growing lately, raising concerns among policy experts and business leaders as well as among the producers of the data themselves. These differing estimates can lead to different readings of such critical indicators as output and productivity growth."

Furthermore, "current estimating techniques fail to capture productivity growth in high technology-using service industries. This shortcoming may lead to underestimates of annual productivity growth."

The Report is overall correct in its assessment of the growth factors for the New Economy.