Official Statistics and the Age of Turbulence J. Steven Landefeld May 12 th, World Congress on National Accounts

2 National Accounts: An Essential Tool  Greenspan on the power of National Accounts:  Framework for examining interdependencies  Framework for assessing relative importance:  Macro  Industry  Regional  International

3 The Role of Official Statistics: Four Examples  Sustainable growth:  Capturing IT in trend growth in real GDP and productivity  Wage inflation?:  Measuring pensions and fringe benefits  The stock market bubble:  Irrational exuberance or mis-measured profits?  Hurricane Katrina:  Assessing the size of the problem

4 Sustainable Growth: Rising Productivity  Greenspan’s expansive policy in the 1990s based on an examination of the inconsistencies in the detailed data that suggested an increase in trend growth and MFP:  Rising compensation costs and profits accompanied by stable prices suggested increasing productivity, but it wasn’t showing up in the industry productivity statistics  Some evidence of rise in aggregate productivity (real GDP), but not entirely consistent with pattern of growth across products, especially IT outside of computers, and IT-intensive and other industries where growth was expected.

5 Sustainable Growth: Rising Productivity  Research at the Fed, BEA, and BLS suggested that trend growth and MFP were rising and that inflation was overstated  Allowed Fed “to be more accommodative to the rise in economic growth than our past experiences would have deemed prudent.” (Greenspan, 2004)  Also prompted improvements in GDP-by- industry series, work to expand quality-adjusted prices for IT products and service industries, and further improvements to PCE and other price measures.

6 Sustainable Growth: IT and Services

7 Better Measuring Unit Labor Costs  Understanding growth in labor costs  Despite a robust economy –- and some increase in hourly wages – the increase in overall NIPA compensation and unit-labor costs seemed low.  FRB (and BEA) research on pension expenses showed that unit labor costs were increasing faster than official data showed.  Provided support for Fed’s progressive tightening between mid 2004 and mid  Revised NIPA estimates of supplements to wages, compensation, and unit labor costs to better reflect rising pension expenses.

8 Irrational Exuberance or Intangibles: Stock Options  The Stock Market Bubble of  “Irrational Exuberance” exacerbated by overstated profits resulted in a bubble that was of concern to policymakers, but not easily addressed by monetary policy  BEA and FRB research on stock option expenses, produced an improved measure of profits, that hopefully will help prevent future bubbles  Widespread use of these profit measures by Wall Street  Change in U.S. law should further improve estimates

9 Irrational Exuberance or Measurement? Corporate Profits Estimates (2002 Annual Revision) vs. S&P Index (Indexed, 1995:II = 100) 0 «« Source: BEA press releases and Standard & Poor’s, Inc. DJIA Sept ,910 DJIA Oct ,048 DJIA Sept ,968

10 The NIPA’s as a Framework: Impact of Katrina  Early estimates suggested a large impact from Katrina.  Analysis of BEA’s data indicated a relatively small impact.  “While these unfortunate developments (associated with Katrina) have increased uncertainty about near-term economic economic performance, it the Committee’s view that they do not pose a more persistent threat. “  FOMC statement of 9/20/05 announcing another 25 basis point increase in the federal funds rate.

11 Table 1: Improvements in Data Related to Monetary Policy Needs:NIPAs  Income:  Improved measures of stock options and pensions, profits, compensation, and unit labor costs.  Faster incorporation of quarterly benchmark of wages and salaries, resulting in more accurate compensation estimates  Integration/Consistency:  Some differences in FRB and Statistical Agency Missions, but work is proceeding on  Integration of BEA internal industry estimates  Integration of BEA NIPA, Balance of Payments, and Tangible Wealth estimates with FRB Flow of Funds and Balance Sheet estimates  Integration of BEA-BLS output and employment estimates

12 Table 2: Improvements in Data Related to Monetary Policy Needs:NIPAs  Inflation:  Development of, and expanded use of, hedonic indexes for IT  Chain-weighted price (and output) indexes  Expanded coverage of services prices  Further improvements in banking and financial measures  Special price indexes, including market-based PCE index  Output:  Improved measures of real GDP and real GDP by industry for services and IT  More timely and more accurate input-output and GDP by industry estimates

13 Table 3: Improvements in Data Related to Monetary Policy Needs:Balance of Payments  Improved Measures of Positions:  More Frequent and Internationally Coordinated Portfolio Investment Benchmark Surveys  More effective use of publicly available information from markets in conjunction with FRB/Treasury TIC reporting system data  Expanded Coverage of Portfolio Flows  Improved coverage of short-term instruments in the measures of real GDP and real GDP by industry for services and IT  Coverage of derivatives (Long-term Capital Management Crisis)

14 Table 4: Improvements in Data Related to Monetary Policy Needs:Balance of Payments  Expanded Coverage of Banking Flows and Positions  Use of counter-party data from the BIS and various countries  Improved Measures of Currency Flows  New source data on bulk shipments  Integration/Consistency:  Integration of BEA NIPA, Balance of Payments, and Tangible Wealth estimates with Federal Reserve Board Flow of Funds and Balance Sheet estimates