Welcome to the Bait and Switch Economy
As corporate America gears up for first quarter earnings season, the whispers of an impending recession are growing louder. In an effort to soften the blow, it seems some government officials are hoping to change the way economic growth is reported.
According to news reports, some Administration officials are considering a change in the way the nation’s gross domestic product is measured, specifically excluding government spending in the calculation.
While the concept of measuring gross domestic product was first articulated in the 18th century, it was during the Great Depression of the 1930s when the idea became the standard for measuring a country’s economic activity.
In 1937 an economist at the National Bureau of Economic Research, Simon Kuznets, wrote a report titled “National Income, 1929-35” to capture total economic production by individuals, companies and the government in a single measure. Following the 1944 Bretton Woods conference that established the World Bank and the International Monetary Fund to stabilize the global economy, GDP became the standard tool for measuring national economic growth. While there have been criticisms of GDP as a tool to track long-term changes in the economy, it has remained one of the most recognizable measures of economic health.
With the U.S. economy caught in a whirlwind of uncertainty and volatility and growing concerns about global trade relations, the idea to recalibrate how GDP is calculated seems less an improvement in economic statistics than an attempt to change the rules of the game.
The push to change the statistical mix that comprises GDP comes as some large American companies are bracing for bad earnings news on the horizon. Investment banks JP Morgan Chase and Goldman Sachs have revised their estimates of first quarter GDP downward – in JP Morgan’s case from 1.5% growth to 1% and for Goldman Sachs from 2.2% to 1.7%. More alarming, however, is news that American Airlines and Southwest Airlines lowered their first quarter earnings estimates.
The lowered expectations from major air carriers could be the first warnings by the canaries in the economic coal mine, as travel expenditures are near the top of the discretionary spending list that normally gets cut when the economy slows. If consumers pull back on spending, those muted predictions of a recession will become louder.
Changing the way gross domestic product is calculated will only serve to make things look better than they really are – which will make the onset of a recession more of a shock to the economic sensibilities of consumers and corporations – ultimately resulting in a more severe economic downturn.
With Wall Street already seemingly in panic mode, gilding the economic lily by changing the way statistics are generated won’t mitigate short-term pain and could make things far worse in the long run.
