Recession, the "New Economy," and Data Indicators: An Imperfect Science

• The U.S. economy is perilously weak.
• Data indicators do not necessarily capture the true essence of this severity.

Over the past 30 years, the United States has shifted from a goods-producing to a service-producing economy, with 8 out of every 10 new jobs created service oriented. What does this mean for the basic indicators used to measure the pulse of the economy? Unfortunately, core U.S. economic indicators such as GDP, industrial production, employment, earnings, prices, and productivity were all constructed decades ago, before this service metamorphosis was underway. Indicators that were accurate in measuring manufacturing then are less effective measuring the health of a service economy today.

Why? The simple reason is that it is much easier to observe and measure physical output than intellectual or value-added contributions. How does one capture a consultant's contribution in product development, for example? The steady evolution of the U.S. economy has made it increasingly difficult to measure output, productivity gains, or even jobs. These types of challenges reflect the difficulty in using aging indicators to track today's dynamic workforce characteristics.

Further complicating the picture, many of the so-called leading indicators are, in effect, backward looking. For example, producer and consumer prices measure the transaction prices for the previous month as measured by the survey period, which is the week including the 12^th day of each month. These prices are heavily influenced by prices for food, energy, and other commodities that are extremely volatile. Thus, the impact of rising and falling crude oil prices are only apparent in the data a month after the fact—when prevailing market conditions can be strikingly different.

These price reports, while they can be a helpful gauge in tracing the impact of changing crude goods prices as they flow through the production process, do little to capture current market prices or, increasingly, what consumers actually experience. This has caused many economists to emphasize real-time spot market prices that are much more dynamic in capturing current pricing trends. Global Insight's Material Price Index, as a weighted average of weekly spot prices, is designed to pick up global commodity pricing trends before trickling down to our traditional U.S. producer price indexes. In other areas, we have also seen a growth in the number of alternative surveys, such as the ADP employment report or the Case-Schiller Home Price Index, which provide either more timely or better views of key markets or sectors.

Thus, as politicians and policymakers work to interpret the data published over the next few months, perhaps we should reflect on the true issue. It is hard to know where you're going if you don't know where you are today. It might be time for the United States to truly invest in our core economic surveys, rather than take a band-aid approach, particularly if we need to make critical and difficult decisions based upon them. It will be some time before the National Bureau of Economic Research officially tags the period we are moving through right now as a recession. By then, the U.S. economy will be expanding again and, perhaps wishfully, the government statistical programs designed to help policymakers navigate the economy will have received much-needed funding.