Stephen Roach (New York)
Lest I be accused of piling on, read no further if you're looking for the next WorldCom. I don't have a clue. But I do know that Corporate America is not alone in cooking its books. Washington statisticians seem poised to join the restatement sweepstakes with a stunning rewrite of the recent performance of the US economy. So much for the boom!
Each July, when many of us head to the beach, the guys with the green eyeshades are hard at work in Washington. They are compiling the so-called benchmark revision of the national economic statistics -- an annual restatement of recent economic history based largely on more complete (and presumably more accurate) samples of underlying activity. This particular benchmark revision is slated to be released on 31 July. Mark that day on your calendar.
There are already some important straws in the wind that hint at what can be expected in the upcoming benchmark revision of the national statistics -- a significant downward adjustment to GDP growth over the three-year revision period, 1999-2001. The government actually pre-releases some of the source data that form the basis of this statistical exercise. Based on this intelligence, downward revisions are likely on three fronts -- capital spending, foreign trade in services, and personal income. The reworking of capital spending seems likely in light of a downward revision to shipments of nondefense capital goods, as recently reported in the 2000 Survey of Manufacturers. The lowering of the surplus in services trade was telegraphed by the just-released revisions of the US Census Bureau. And the downward revisions in personal income come from the US Bureau of Labor Statistics' so-called ES-202 survey -- the primary benchmark for wage and salary disbursements.
Rest assured of one thing -- these downward revisions are not likely to be trivial. For example, shipments of nondefense capital goods are now estimated to have increased only 5% in 2000, half the previously estimated 10% gain. In addition, the surplus in services trade for 2001 was lowered by more than 10%, from $79 billion to $69. Moreover, the reductions in private wage and salary disbursements could be at least $100 billion in 2000, enough to slice more than one percentage point off the growth rate of total personal income. The precise magnitude of the revisions, insofar as their impact on overall GDP growth is concerned, is hard to determine at this point. The real GDP growth rates of record currently stand at 4.1% for both 1999 and 2000. Based on back-of-the-envelope calculations, it wouldn't surprise me at all if aggregate growth were lowered by at least one percentage point in either or both of these years.
Of equal importance is what the prospective revisions are likely to say about the character of the US economy as it neared the end of the now-fabled boom. The income revisions hint at a downward adjustment to the already anemic level of personal saving. Dick Berner informs me there is some possibility that a downward adjustment in retail sales may imply an offsetting reduction in personal consumption. That may well be true, but my experience tells me that income revisions typically outweigh those on the spending side of the equation -- especially since the retail sales sample has had such a difficult time measuring the rapidly growing e-commerce portion of consumption. As it currently stands, the personal saving rate is estimated at a near rock-bottom 1.6% in 2001, up fractionally from the record low of 1.0% in 2000. I wouldn't be surprised to see both numbers pruned significantly.
The foreign trade revisions could up the ante on America's current-account conundrum -- a key point of tension in the US and global economy that I have been stressing for some time. That would dovetail nicely with the likely downward revision in personal saving. After all, a saving-short US economy has no choice but to rely on foreign capital to close its saving-investment gap. A wider current-account deficit implies an even greater capital-account surplus than we had previously been led to believe -- underscoring the distinct possibility that America has been even more dependent on foreign capital inflows than we had previously thought. Little wonder the dollar is now under such pressure, as foreign investors reconsider their once seemingly voracious appetite for dollar-denominated assets.
Finally, there's the Holy Grail of the recent bubble to consider -- productivity growth. Lower GDP growth likely reduces the numerator in the productivity equation -- the output portion of output-per-hour. As currently estimated, productivity growth averaged 2.6% over the 2000-01 period. Inasmuch as one of those years (2001) is still considered a recession year, this increase has been widely judged as nothing short as astonishing. I've never been too sympathetic to that argument -- mainly because the so-called recession was the shortest and mildest on record (see my 21 February 2002 dispatch, "Productivity Noise"). But that's really beside the basic point: A downward adjustment is probably in the works for the recent productivity trend. The accompanying reduction of capital spending fits this revisionist script quite nicely. To the extent that the recent productivity bonanza was nothing more than the arithmetic by-product of "capital deepening," there should be a close correspondence between a reduced pace of capital spending and lower growth in output-per-hour. And so another key building block of the New Economy gets called into serious question.
The US accounting profession has a lot of egg in its face right now. As the numbers get restated, the great earnings bonanza of recent years is being questioned as never before. While the government's national income accountants are hardly in the same boat as those at Arthur Andersen, both groups of professionals appear to be guilty of having overstated much of what was supposedly so glorious about the New Economy. We have a saying in America, "What goes around, comes around." Sadly, the numbers we were all told to trust have simply turned out to be wrong -- wrong for companies, wrong for the economy at large, and wrong in the eyes of financial markets. I guess the words of Benjamin Disraeli will always haunt me, "There are three kinds of lies: lies, damned lies, and statistics." Such are the painful excesses of any bubble. WorldCom is not the end of this saga.