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PCBB Banc Investment Daily August 06, 2013
Banc Investment Daily
August 06, 2013

GDP is Going Up

You have certainly heard about the Royal Baby born in Brittain recently, who could become the King of England 60Ys or so from now. The question is, do you really care and more important, do the Brits care? After all, the monarchy no longer has any power to rule the country and it costs a bundle to keep up all those castles. The Brits ??for the most part (about 80%) do approve of the monarchy, saying it instills a sense of British identity and pride. That's nice, but being jaded colonialists, we think it is because the monarchy mainly brings tourists to England. Not to say tourists wouldn't come to England otherwise - there is the cuisine and the weather after all and many people like to visit castles. We just think it means more if there is a real queen and a few princes around. One could say the value of the monarchy is almost entirely intangible. But intangible does not mean there is no value. A British company that evaluates intangible assets said the Royal Wedding (which preceded the Royal Baby) boosted the economy by around $165mm.
We are all hearing a bit more about valuing intangibles in the US as the Bureau of Economics changes the way it measures gross domestic product (GDP). As such, the numbers going forward have been adjusted and also revised all the way back to 1929, the first year GDP was measured. The net result is that GDP gets a 1x boost of 2.7%. Capturing such things as intellectual property like music, art and books as long term assets helps, as does the reclassification of research and development into a category of investment much like building a factory.
In the past, R&D has been treated like an expense, like paper for the copier or a piece of furniture for the office. This point of view may have worked for much of the 20th century when the economy was primarily based on the production of goods, but not now. These days, most efficiencies in business are related to technology and ideas, most of which come from R&D.
Valuation can be tricky. Consider the value or worth of a good idea. How do you depreciate an idea? Federal Reserve Chairman Ben Bernanke emphasized the necessity of the adjustment to GDP, saying "We will be more likely to promote innovative activity if we can measure it more effectively..." Measuring activity is critical and economists have talked about the value of innovation since the early 1900s. Unfortunately, accounting has lagged behind.
The US economy in particular is heavily weighted towards intangibles including designs, trademarks, patents and processes. Not all forms of intangible investment will become a part of the GDP number though, as excluded items include things like worker training and brand recognition development (just no methodology for measuring them yet).
In the end, the new measures are far from perfect, but are hopefully a better gauge of the economy as a whole and its growth. Since banks view GDP as the baseline percentage for loan growth and opportunity this is important. This should assist everyone in defining their priorities, understanding where to market more and hopefully lead to new customer opportunities.