Risk Management, Trading & Portfolio Strategies

U.S. government gears up for new GDP scale

The U.S. government is significantly changing how it calculates Gross Domestic Product (GDP).

The U.S. government is significantly changing how it calculates Gross Domestic Product (GDP).

Economic history is being "rewritten," according to a statement from a senior official at the Bureau of Economic Analysis (BEA), a key office at the U.S. Department of Commerce. This unit is mandated with drawing up vital economic analysis over the course of a given year, most importantly the quarterly Gross Domestic Product (GDP) readings.

Yet in recent months, speculation has mounted that the Obama administration would push ahead with what amounts to a significant reworking of how GDP growth or recession is determined. Multiple news sources are reporting that these changes will be arriving soon, potentially pushing up GDP figures going as far back as 1929.

Spending on research and development will now be included as part of the wider GDP calculation. Additionally, copyrights will now be treated as an investment, giving them a monetary value that will be included as national growth.

More interesting is the fact that pension deficits – in which money is spent on benefits liabilities – will also be factored in. According to The Financial Times, "[these] changes in years will add the equivalent of a country the size of Belgium to output in the world's largest economy."

In an interview, Brent Moulton, a BEA official who is helping to spearhead the effort, acknowledged that the action would be wide-reaching.

"We are carrying these major changes all the way back in time – which for us means to 1929 – so we are essentially rewriting economic history," he commented in the Times interview.

The implications for risk analysis and management are that investors will now have a great raft of data to figure out which fundamentals are indicative of future growth. More simply, factors that determine the pace of economic expansion are more easily discernible. Yet given the current regulatory climate – and the continuation of the Federal Reserve's monetary stimulus programs – it could be some time before the differences are felt in the market.

In the meantime, investors can turn to technology to aid them. SmartStops are an innovative backstop against systemic losses, and investors may use them to set pre-determined risk limits long before adverse conditions prevail. Learn more about these portfolio management tools by clicking here today. 

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