According to this week’s Business Week cover story – The Real Cost of Offshoring – government statisticians have acknowledged that the growth of domestic manufacturing has been “substantially overstated” in recent years. What does that mean? Well, it could mean a lot.

The ripple of this miscalculation means that productivity gains and overall economic growth have been overstated as well:

“And that raises questions about U.S. competitiveness and ‘helps explain why wage growth for most American workers has been weak,’ says Susan N. Houseman, an economist with the W.E. Upjohn Institute for Employment Research.”

Business Week’s analysis traces the problem back to the import price data published monthly by the Bureau of Labor Statistics. In short, many of the cost cuts and productivity innovations being made overseas by global companies and foreign suppliers “aren’t being counted properly.” The government then uses this “erroneous” import price data as part of its calculation for many other major economic statistics, including productivity, the output of the manufacturing sector, and the real gross domestic product. (Click here for an explanation how the data are calculated.)

“The result? Business Week’s analysis…reveals offshoring to low-cost countries is in fact creating ‘phantom GDP’ – reported gains in GDP that don’t correspond to any actual domestic production. The only question is the magnitude of the disconnect.”

Is this cause for real concern? Yes.

“There are potentially big implications. I worry about how pervasive this is,” says Matthew J. Slaughter, an economist and former member of President Bush’s Council of Economic Advisers.

Business Week’s “admittedly rough estimate” shows that about $66 billion in phantom GDP gains may have been created since 2003 as a result of this problem.

“That would lower real GDP today by about half of 1%, which is substantial but not huge. But put another way, $66 billion would wipe out as much as 40% of the gains in manufacturing output over the same period.”

And:

“The official statistics show that productivity, or output per hour, grew at 1.8% over the past three years. But taking the phantom GDP effect into account, the actual rate of productivity growth might be closer to 1.6% — about what it was in the 1980s.”

So, what are the implications of phantom GDP?

“For one thing it calls into question the economic statistics that the Federal Reserve uses to guide monetary policy.”

“In terms of trade policy, the new perspective suggests the U.S. may have a worse competitiveness problem than most people realized. It’s 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 on a façade of growth, that’s a different story.”

Business Week reports that there is still much to be sorted out in this analysis to truly understand all the implications. However, just the acknowledgement by government officials that domestic productivity has been overstated is significant and far reaching.

While many have countered the 3.2 million manufacturing jobs lost since 2000 with a quick response that manufacturing productivity and technology is on the rise, it looks like those big gains they point to might not be true. In fact, once we look past this “façade of growth,” we will likely see what most Americans already know – that they have good reason to feel anxious about their economic security.

This entry was posted on Friday, June 8th, 2007 at 5:45 pm and is filed under Manufacturing in the U.S., Economic Security. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.