Really? The Fastest Growth In GDP Since 2003?

In the latest iteration of Gross Domestic Product (GDP), we were told that the economy grew at 5% in the third quarter of this year.  This coupled with a 4.6% growth in the second quarter apparently gives us the fastest economic growth since 2003.

But, let me ask you this.  Do you feel like, financially, you are living in the best of times in the last 11 years?  Probably, not. 

So, why does the GDP growth look so good?  The answer is simple. Nearly a half trillion dollars in extra growth is being added to the GDP numbers each quarter that wasn't being counted in 2003.  That's because, beginning with the 2nd quarter of last year, the folks who calculate the GDP each quarter, the Bureau of Economic Analysis, started adding in the value of intellectual property -- the costs of research and development of new products, and the costs of buying copyrighted material such a movie scripts, books, songs, etc.  Previously, those costs were merely counted as intermediate business expenses that were ultimately rolled up into the final cost of the product and not counted as part of the GDP.

To understand that this is a significant change, let me use the example of a fictional publishing company who spends $100,000 to buy the rights to print an author's book.  In the past, that $100,000 was just written off as a business expense and the real value of it was enumerated in the GDP when the book was sold.  Today, under the new and creative accounting for intellectual property, that $100,000 cost is added to the GDP up front.  Then, subsequently, the book's sales are also added to the GDP when they occur.  This sure seems like some kind of double counting. Doesn't it?

Many believe this trickery adds a full one percent to the GDP growth each quarter.  So, last quarter's growth was probably only 4% -- not 5% -- when the old method of accounting was used.  Similarly, the 4.6% growth in the second quarter would have been 3.6%.  However, this new method of calculating the GDP certainly gives President Obama bragging rights regarding the growth of the economy being the fastest since 2003.

Lastly, in my opinion,  the best measure of the health of the economy is what you and I are spending.  And, last quarter, Americans only spent at an increased rate of 2.5%; well behind a supposed overall growth of  5%.  What's worse is that the  consumer is taking on record amounts of credit debt while increasing their spending.  Not a good thing.  What really drove the growth in GDP was a 9.9% growth in government spending and 8.9% increase in business investment (which includes intellectual property).

References:

The U.S. economy grew at its quickest pace in 11 years in the third quarter, the strongest sign yet that growth has decisively shifted into higher gear: http://www.cnbc.com/id/102291457

GDP: Does Lady Gaga Count?: http://www.econlife.com/gdp-does-lady-gaga-count/

GDP Revisions Make Recovery Look Better, Recession Not as Bad: http://blogs.wsj.com/economics/2013/07/31/gdp-revisions-make-recovery-look-better-recession-not-as-bad/

U.S. consumer credit up a record amount in July: http://blogs.marketwatch.com/capitolreport/2014/09/08/u-s-consumer-credit-up-a-record-amount-in-july/

With GDP growing strongly, Republicans' economic dilemma gets more complicated: http://www.washingtonpost.com/blogs/plum-line/wp/2014/12/23/with-gdp-growing-strongly-republicans-economic-dilemma-gets-more-complicated/

pb