When US numbers are only make believe

By ANTHONY HILTON FOR MAILONLINE
Updated: 19:00 EST, 11 August 2003

THE cheerleaders for the American economy have been out in force again in the past few days, trying to convince themselves and indeed everyone else that the world's biggest economy has got over its woes and is truly on the mend.

To be realistic though is to have doubts, not because the published American growth figures are wrong but because they are seriously misleading. American economic statistics are compiled and adjusted in ways that consistently give a much more upbeat result than one would get if the same numbers were collected and published under the conventions for national statistics used in Europe.

This was something that US Federal Reserve chairman Alan Greenspan himself eventually came to admit, although not until he had gone a long way down the track in indulging the dotcom mania, and he admitted it in such a way in Congressional testimony that few grabbed the significance of what he was saying at the time.

It is, however, now widely recognised that the greater part of the productivity miracle that allegedly transformed the performance of the US in the last decade, and led to Greenspan's tolerance of the stock market bubble, existed mainly as a statistical aberration. But that painfully learned lesson is already being forgotten. Those who hail the return of growth across the Atlantic have to remember that they still collect the figures in the same biased and bullish way.

The main factor in inflating the figures is hedonics, a term that will be meaningless to most people. What it seeks to recognise is that this year's computer is much more powerful than last year's model, this year's car is better, and every bit of plant and machinery purchased will show some sort of improvement not reflected in a higher purchase price.

What hedonic adjustments do is measure this gain in efficiency, put a cash value on it and add it to the economic growth figures.

So if a new computer is twice as powerful as one of a year ago but costs the same $1,000, then a further $1,000 is added to the growth figures to account for that extra power.

It does not take long on this basis to add considerably to the overall growth figures. The problem is that, rather like the creative accounting in the books of Enron and indeed many British companies down the years, however healthy these notional profits appear, the cash is not there and it cannot be spent.

In the case of the US economy, which is 80% dependent on consumer spending, the gap between book entry and reality makes a big difference.

Jobs on the line

IF you live in the South, deflation is something that only happens to other people. In Scotland and Ulster, they have been used for more than 50 years to losing jobs to foreign competition because the domestic plants, shipyards, factories and mines were uncompetitive internationally.

Then in the 1970s and 1980s the rest of the UK felt the squeeze, partly because of union intransigence and then because of a currency overvalued by the impact of North Sea oil, and everything from northern shipyards to the motor industry went much the same way.

The South was largely unscathed because the engine of its growth in London and its surrounds was the explosion of activity in international financial markets and the positioning of the City as the leading international financial centre.

Far from salaries in the Square Mile being depressed, they gradually lost all contact with reality in the other direction - at least for the favoured and not so few. Their spending power brought the boom in property, restaurants and high-end retailing, and helped drive economic growth throughout the UK. The British economy became a giant hedge fund with a long-only position in financial services.

Now, though, there is the prospect of real competition, and of jobs going overseas to much cheaper locations. Inevitably, however, the competition does not come from where it might have been expected, from rivals such as Paris, Tokyo and New York.

Rather, it comes in the threat of India and the growing ability of companies to use international telecommunications to fire their British staff and locate whole activities and departments to the subcontinent where they can operate at a fraction of the cost.

Tens of thousands of jobs have already gone and many more will follow, exerting significant downward salary pressure on those who are left. In the coming decade, for the first time in a generation, deflation and lower incomes are a real prospect for the City.