SCDigest Editorial Staff

The News: An upcoming report from the W.E. Upjohn Institute for Employment Research and additional analysis by Business Week says that for the past several years anomalies in the way the US government accounts for imported goods has had the effect of overstating economic growth, domestic manufacturing output, and productivity growth.

SC Digest Says:

All this together says US manufacturing competitiveness in a global economy may be in worse shape than many believed What do you say? Send us your comments here

The Impact: The report may explain the disconnect many have observed between the incredible growth of imports over the past three years, especially from China, with what appeared to be still robust US manufacturing growth yet stagnant wages. If the new analysis proves accurate, it is likely to spur aggressive calls for new, more protectionist policies in Washington.

The Story: The report upon which the Business Week story is based has not yet been fully released, and the problems with the economic statistics are not really clear, but many believe a real issue with the calculations have been identified.

For example, Matthew J. Slaughter, an economist at the Amos Tuck School of Business at Dartmouth College who was previously on the Council of Economic Advisers, said after looking at the analysis, "There are potentially big implications. I worry about how pervasive this is."

We boil down what this may all mean:

• Various statistical measures of the US economy may not be correctly interpreting the impact of imports and outsourced production; exactly how takes an economist to figure out, but it looks like there are some real issues.
• As a result, US GDP growth may be reported at half a percent higher than it really is; with reported GDP growth in the 2-3% range, this is actually a sizable error, if true. The accounting is producing “phantom” GDP.”
• The impact on manufacturing data is much greater, however. There, manufacturing output may be overstated by as much as 40% - a huge discrepancy.
• This, in turn, would say that the impact of imports on US manufacturing levels and competitiveness is much more severe than economic statistics have indicated – and would explain why anecdotal evidence indicated a large impact on US production, but that it didn’t seem that way from overall statistics.
• These discrepancies, in turn, also then overstate US productivity growth – again, by a substantial amount.

All this together says US manufacturing competitiveness in a global economy may be in worse shape than many believed.

In addition to perhaps in part explaining disconnects between statistics and appearance, if further analysis supports the accounting errors, it is likely to lead for calls for increased trade protection or other measures.

As Business Week notes: “It was easy to downplay the huge trade deficit as long as it seemed as though domestic growth was strong. But if the import boom is actually creating only a facade of growth, that's a different story. This lends more credence to corporate leaders such as CEO John Chambers of Cisco Systems who have publicly worried about U.S. competitiveness--and who, perhaps coincidentally, have been the ones leading the charge offshore.”

Are you not surprised the statistics may have understated the impact of offshoring on the US economy, and manufacturing output in particular? Do you care?  If proven accurate, do you think any policy changes should be made as a result? Let us know your thoughts at the Feedback button below.