Tuesday, August 06, 2013

Is Pittsburgh's economy actually doing better than we think it is?

I know very few folks will read another word once I point out this is all about a major change in economic accounting related to expanded capitalization of intellectual property products and a change to accrual accounting for defined benefit pension plans. Yet it really could be important for Pittsburgh.

Measuring the size of the economy is a big deal. Today the economic metric above all others is Gross Domestic product (GDP).   It also has not been as consistent over time as you might think.  Revisions big and small happen routinely. It has not always been the top measure either. 20 years ago old farts including this author will remember when the top dog of economic statistics was GNP, or gross national product.  GNP still exists as a metric, but a couple decades ago the star chamber of economists decreed that a slightly different metric called GDP,was a better way to measure the size of the economy. The simple story of the difference has to do with whether you are measuring value added by ownership or not. With the rise of multinational firms, it made less sense to look at the production of American owned firms as a basis for measuring growth in the economy. You had to look at where production was taking place. But enough on that, just perspective that not all numbers stay the same.

It turns out that GDP in itself does not quite have a static defintion.  What goes into the pot, so to speak, gets revised routinely.  Just last month a relatively bigger revision took place in GDP calculation.  The change of note for Pittsburgh is that a greater amount of expenditures for research and development are henceforth to be counted as investment spending. Who does a lot of research and development?  Just look around town.  For those who want to dig into the weeds even further here is the official description of one big change going forward:
Expenditures by business, government, and nonprofit institutions serving households (NPISH) for research and development (R&D) are recognized as fixed investment.  The new treatment improves BEA’s measures of fixed investment and allows users to better measure the effects of innovation and intangible assets on the economy. BEA July 31, 2013  emphasis added

The change in how R&D is capitalized added just under $400 billion to the calculated size of the US economy. Some have been written on this already, probably more clearly than I am doing. See Daily Beast: New Calculations of U.S. GDP Finally Take Research and Development Into Account. If I've lost you, read it from others. One writer at Forbes puts it in a more succinct perspective: Did 'Kramer, Hawkeye, And Fonzie' Goose GDP? (always resort to MASH analogies if desperate). Most of the esoteric punditry has had a national perspective. Unsurprisingly, the small bit of local/regional notice has come from some higher tech regions such as Seattle. Seattle Times: The story behind the new and improved GDP number. I'd argue this all has as much impact on measuring Pittsburgh's economy as it does Seattle's.

Why? This all could have some disproportionate implications for Pittsburgh.  The latest national GDP calculations released (2012 US GDP - $16.2 trillion) have implemented this change, but there have been no new metropolitan level GDP data released as yet.  Metro level GDP has only been released up to 2011 as yet. 2011 Pittsburgh MSA GDP  was $117 billion and its growth over 2010 was a pretty respectable +4.8%, before any of these changes were implemented. 

When we see MSA level data that account for R&D the same way, we may learn that the Pittsburgh economy is not only bigger than we think it is, and possibly that it has been growing faster than previously thought in recent years.  All the things we talk a lot about, to include research expenditures at local universities (see the emphasis on nonprofit institutions noted above), to a lot of the research expenditures at local tech firms (cough... Google... cough) are all going to contribute greater amount to Pittsburgh's metro region GDP than previously were being used in the calculations. The marginal $billion or two.. or three... that this accounting change might add to the size of Pittsburgh's economy would go a long way to explain some of the recent positive economic trends that still seem to befuddle many a nabob around town.

So we will have to wait and see for hard data. Lots of positive buzz about Pittsburgh of late. Folks looking at employment, earnings, labor force and real estate prices will all see generally positive trends compared to other regions, and certainly compared to any time in Pittsburgh's recent past.  Maybe the latest changes to GDP calculations are going to better explain what is really going on here?


Anonymous The Wiz said...

If R & D and intellectual activities have such an impact on Pittsburgh economics, what do the charts for Silicon Valley look like?

Wednesday, August 07, 2013 8:35:00 AM  
Anonymous BrianTH said...

Great questions, Chris, and I will look forward to finding out the answers.

Incidentally, as The Wiz is suggesting, Pittsburgh won't be the MSA most affected in gross terms by a long shot, and probably will be at least a good ways down the list in terms of percentage increase (but likely higher than average). However, I'm particularly interested in seeing how this revision affects our understanding of local trends.

Wednesday, August 07, 2013 11:09:00 AM  

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