Reviewer: Robert A.Clark, PhD, CFA

The GDP statistics released on Oct. 29 report a strong 3.5% annualized growth rate, above analysts' forecasts. This breaks the string of four negative quarterly rates in a row. It also shows productivity increased during the quarter. However, the figures could be overestimated by as much as one percentage point or more.

The reason is that the data overlook intangible investments such as research and development, worker training, and product design, all areas where businesses have cut back, and yet these are essential to future growth. Yet this shift in investment patterns is not reflected in the GDP and productivity statistics. In fact, over the past year, the employment of scientists and engineers has fallen by 6.3%. This loss of productivity by talented individuals is a cost to the economy that is unrecorded in the traditional indices.

While work is being done to integrate some of these factors into GDP calculations, that may be as much as four years into the future. The offshoring of more research to other countries also creates a challenge to the system. Venture capital investment in the form of support for scientists, engineers, and new product development has fallen as well. Alcoa reduced its R&D by 36% in the third quarter. Even with government stimulus money, R&D investment has declined for the second straight year. As many firms cut R&D personnel to preserve cash, they will eventually be confronted with a lack of new products coming to market.

Worker training has also suffered in the decline. U.S. companies spend $134 billion worldwide on training, but employers reduced per worker spending by 3.8% in 2008. Including R&D and worker training investments in GDP calculations would be difficult but would allow GDP to be more accurate in reflecting the state of the economy. Estimates are that growth in the current quarter would be a percentage point lower if the intangible items had been factored into the calculation.

1. Discuss how outsourcing research and development can hurt the U.S. economy.
   
   
2. Debate whether there are benefits to a more global approach to calculating GDP.
   
   
3. Debate whether the United States should recalculate the GDP to include more intangible investments.
   
   
4. Discuss how firms increase productivity during a recession.
   
   
5. Debate how you believe governmental statistics can influence consumer behavior and the political implications of statistics.

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