• DATVF.VWU
    1.714
    0.122
    7.7%
  • DATVF.PHLCHI
    0.960
    0.036
    3.9%
  • DATVF.VNU
    1.542
    0.074
    5%
  • DATVF.LAXDAL
    1.648
    -0.009
    -0.5%
  • DATVF.VEU
    1.637
    0.100
    6.5%
  • DATVF.SEALAX
    1.274
    0.127
    11.1%
  • DATVF.CHIATL
    2.076
    0.072
    3.6%
  • DATVF.ATLPHL
    1.875
    0.192
    11.4%
  • DATVF.DALLAX
    0.901
    0.008
    0.9%
  • DATVF.LAXSEA
    2.155
    0.118
    5.8%
  • DATVF.VSU
    1.275
    0.000
    0%
  • ITVI.USA
    7,407.780
    -277.470
    -3.6%
  • OTRI.USA
    7.380
    -0.340
    -4.4%
  • OTVI.USA
    7,394.280
    -271.790
    -3.5%
  • TLT.USA
    2.710
    -0.250
    -8.4%
  • WAIT.USA
    158.000
    8.000
    5.3%
  • DATVF.VWU
    1.714
    0.122
    7.7%
  • DATVF.PHLCHI
    0.960
    0.036
    3.9%
  • DATVF.VNU
    1.542
    0.074
    5%
  • DATVF.LAXDAL
    1.648
    -0.009
    -0.5%
  • DATVF.VEU
    1.637
    0.100
    6.5%
  • DATVF.SEALAX
    1.274
    0.127
    11.1%
  • DATVF.CHIATL
    2.076
    0.072
    3.6%
  • DATVF.ATLPHL
    1.875
    0.192
    11.4%
  • DATVF.DALLAX
    0.901
    0.008
    0.9%
  • DATVF.LAXSEA
    2.155
    0.118
    5.8%
  • DATVF.VSU
    1.275
    0.000
    0%
  • ITVI.USA
    7,407.780
    -277.470
    -3.6%
  • OTRI.USA
    7.380
    -0.340
    -4.4%
  • OTVI.USA
    7,394.280
    -271.790
    -3.5%
  • TLT.USA
    2.710
    -0.250
    -8.4%
  • WAIT.USA
    158.000
    8.000
    5.3%
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Commentary: Does the GDP Matter? Chapter Deux

FreightWaves features Market Voices – a forum for voices with unique knowledge of numerous transportation/logistics/supply chain sectors, as well as other critical expertise.

Last week I wrote about how truckers and freight brokers who are at the top of their profession possess all the talents you’d expect in most successful people in any industry, but they often have another skill that isn’t typically found in other industries. Successful people in the transportation industry are frequently pretty decent economists as well. I wrote why I thought that was true, before asking, “if transportation professionals are managing a cyclically sensitive business and most of them are pretty decent economists, why don’t they pay more attention to the reporting of the GDP? Should they be learning anything from it? What, if anything, should they be looking at?”

I also offered a little history lesson: “The methodology used to calculate GDP was developed in the 1930s, as the U.S. struggled through the Great Depression.” I went on to assert, “it was a noble endeavor that did produce many benefits, but as our economy has changed in the 80 years since, some of the GDP calculation methodologies have become irrelevant or even counterproductive. Two of the most glaring examples are the way inventories effect the calculation of the GDP, and the way imports and exports effect the calculation of the GDP.” I explained inventories last week. This week I will dissect the imports and exports.

Using the current methodology, all imports are considered a negative and all exports are considered a positive in the calculation of GDP. There is still some sound logic to this (and it was very sound logic in the 1930s), but there are also some serious shortfalls and faults with this methodology, and many of these pitfalls and complications they create have become magnified over time. 

The logical basis of the methodology was that if the U.S. is producing more of a product than needed (bushels of grain, ingots of lead, copper wire, bales of cotton, etc.) and the excess amounts are exported to another country, then the U.S. is more prosperous, and can use that foreign country’s payment for our export to buy something we don’t have, can’t make (or can’t make enough of) or simply want.  To the extent that the value of our exports exceeds the value of our imports, our economic wealth has grown; to the extent that the value of our exports exceeding the value of our imports continues to expand, our economic wealth grows further. Makes sense? So, what is the problem? There are many problems, but the most basic issues revolve around identifying and valuing what is being imported and exported.

Identifying what is being imported and exported

  1. If we produce a million more bushels of corn or a million more barrels of crude oil than we need and hence we export them to another country with a currency of value, then indeed it should be added to the measurement of our prosperity, our creation and expansion of economic value, our GDP. 
  2. If GE sells the technology behind the design and production of power turbines to the Chinese for $20 billion U.S. Dollars, it will be added to the calculation of GDP in the quarter in which it occurs as an export. Yes, in that period it is a positive, but the Chinese will never buy another power turbine from GE. In every period that follows, it is a negative. This means that by failing to identify what was being exported, it was falsely considered a positive to GDP, and there is no current manner in the method used to account for the ongoing negative created. 

Side note – this is at the core of the issues created by intellectual property theft. How many trillions? How many percentage points of GDP growth are lost because intellectual property, created and owned by the U.S., was stolen or otherwise unlawfully appropriated? Since we don’t adequately quantify the legal transfer of intellectual property, quantifying the illegal transfer of intellectual property becomes even more difficult, and as a result it is tougher to highlight the perilous danger of the threat or the significant magnitude of the unending damaging drain to our prosperity that intellectual property theft continues to be.    

  • Assume that Toyota or Hyundai decides to build a new auto assembly plant in Tennessee, and imports millions of dollars of automated manufacturing equipment and industrial machine tools from Germany, Sweden or the Netherlands. The value of that equipment is considered an import and is therefore a negative in the calculation of the GDP in the quarter that it clears customs. In every period that follows, the equipment and machine tools will be operated by U.S. workers to produce vehicles, creating wages and the economic value of the assembled autos, that are sold here or transported to a port to be exported and sold elsewhere. All of these are positives to our GDP. Our ‘old school’ GDP calculation methodology fails to capture the value that those imported machine tools represent, nor does it properly capture the operating profit that all the subsequent activity creates for a foreign corporation.

Identifying and assigning value to what is being imported and exported

Approximately $440 in parts and pieces are imported for assembly into China by Apple (a U.S. corporation). The cost of/value of the Chinese assembly (Foxconn) represents < $10.  The value of the new IPhone, 2X wholesale (~$800) and 3X retail list price (~$1,200), is driven by the intellectual property, content and elegant engineering of Apple, yet as that new IPhone is imported into the U.S. it is counted as a negative to our GDP at $440 a unit. It is estimated that cell phones alone were more than 17 percent of the U.S. trade deficit with China in 2018. In this example, reducing the value assigned to the trade deficit with China, from the assembled cost to the Chinese cost, would eliminate 97 percent of the amount. Granted it would increase the amounts recognized as trade imported from other countries (see side note 2), but it significantly lowers the perceived “massive trade deficit” the U.S. has with China. 

Side note 2 – Approximately $110 for the display from South Korea, $70 for the A12 chip (designed by Apple, made in Taiwan) and $70 of other parts from the U.S., $65 of memory/processing chips and $45 of cameras/image sensors from Japan. Suppliers from Germany, France and the Netherlands join the list of suppliers, as touchscreen controls, batteries, gyroscopes, radio frequency modules, fingerprint sensors, earpieces, microphones and loudspeakers, tapic engines (the vibration motor) and the main chassis, et al., are shipped into China. U.S. corporations provide: audio chips and Codec (Cirrus Logic); modems and broadband processors (Intel, Qualcomm); camera (OmniVision); touchscreen controls (Broadcom); transmitter and amplification modules (Skyworks, Qorvo); controller chips (PMC Sierra, Broadcom); and semiconductors and other components (Texas Instruments, Cypress Semiconductor, Murata, Fairchild, Maxim Integrated). 

  • If the value of a product is created outside the U.S. borders, but the production process is owned or controlled by a U.S. corporation or citizen, and the economic value created is controlled, owed to or owned by a U.S. corporation or citizen, shouldn’t part of that value be considered in the calculation of U.S. GDP?
  • If a service, intellectual property or data is provided over the web, how are the consumption, the revenue and the operating profit measured and who does that economic activity belong to?  If a subscription to Microsoft software is produced and provided in the U.S. but paid for in Euros and consumed in Germany, is the sale of the subscription an export, the consumption an addition to the German economy, and the repatriation of operating profit an import?               

Point being, the modern economy has many activities and transactions that are either not captured or poorly measured by the ‘old school’ GDP calculation.

What should transportation professionals do? 

It is relatively simple. When the GDP number is released, go to the Bureau of Economic Analysis (BEA) website and click on the “Full Release & Tables” link. Scroll down through that document to the page that lists the “Contributions to Percent Change” (usually page 8) and find the line item for “Net exports of goods and services.” Subtract that number from the number reported and you will have taken the second step (first step of subtracting inventories was described last week) in adjusting the reported GDP number, from one that isn’t as relevant or useful in today’s economy, to one that is a much more useful gauge of how the overall U.S. economy is performing. 

Recent example of the adjustments:

  • In the first quarter of 2019, the GDP was reported as 3.2 percent initially, and then revised down to 3.1 percent. Both numbers seem stronger than the economy most of us experienced. 
    • As I described last week – Inventories grew in the first quarter and added 0.60 percentage points to the calculation. Subtracting the increase in inventories takes the GDP down to 2.5 percent, which is closer to the level of activity that most of us experienced in the first quarter.
    • Exports grew at a slightly faster pace, adding 0.58 percentage points, while imports grew at a slightly slower pace adding 0.39 percentage points. Together these factors added 0.96 percentage points to the GDP calculation. Subtracting this from the 2.5 percent arrived at by subtracting the inventory adjustment takes the first quarter 2019 GDP down to 1.5 percent, which is far more representative of the economy that the transportation industry experienced.

Bottom line – while some of the calculation methodology of GDP has become outdated, with a few simple adjustments, it can serve as an additional benchmark and reliable economic indicator for all of us in the transportation industry.

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Donald Broughton, Principal & Managing Partner, Broughton Capital

Prior to starting Broughton Capital Mr. Broughton spent nine years as the Chief Market Strategist and Senior Transportation Analyst for Avondale Partners. Before that, Mr. Broughton spent over twelve years at A.G. Edwards. At A.G. Edwards, in addition to being the Senior Transportation Analyst, he was the Group Leader of the Industrial Analysts and served on the firm’s Investment Strategy Committee. Prior to going to Wall Street, Mr. Broughton spent eight years in various distribution and operations management roles in the beverage industry, including serving as the Corporate Manager of Distribution for Dr. Pepper/Seven-Up companies and Chief Operating Officer for Bevmark Concepts.
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