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Mid-Decade Strategic Review of BEA's Economic Accounts: An Update

In the February 1995 SURVEY OF CURRENT BUSINESS, BEA published, as part of its Mid-Decade Strategic Review, a draft plan for maintaining and improving the performance of its national, international, and regional accounts. Comments on the draft plan were invited to provide the basis for the preparation of the final version of the plan, which is the final step in the review process. This article summarizes the comments on BEA's draft plan that were expressed at a March conference of users of the accounts, presents a plan that reflects those and other comments, and outlines the first steps in implementing the plan.

The Users' Conference

On March 21, 1995, about 50 leading users of the economic accounts gathered to share their views on BEA's draft strategic plan. They were invited to comment on whether BEA had identified the issues correctly and had proposed the most effective steps to maintain and improve the accuracy, reliability, and relevance of the economic accounts over the coming decade.

After welcoming remarks by the president of the U.S. Chamber of Commerce, which hosted the meeting, and by the Secretary of Commerce, the Under Secretary of Commerce for Economic Affairs described the challenge of the statistical system as being similar to that of a tailor trying to measure a sprinting athlete for a suit of clothes: The statistical system must not only keep pace with a rapidly changing economy, but must also be twice as agile in order to measure it accurately. The Director of BEA then introduced the draft strategic plan, which was structured around three major issues: The need for new and improved output measures; the need for better measures of investment, saving, and wealth; and the need to fill gaps in the coverage of international transactions.

The first three sessions of the conference focused on the major issues BEA had identified. (The agenda for the conference is reproduced in the box on page 49.) Each of these sessions started with an overview of the issues and proposed actions; after the overview, a panel presented views and reactions, and then the discussion was opened to all participants. A fourth session dealt with the challenge of improving statistics in the face of resource constraints.

Overall, the participants agreed with the issues BEA had identified and the actions that BEA had proposed for the next several years. Participants urged more emphasis on some elements than they thought BEA had placed on them, or they suggested a different priority; in a few areas, participants suggested additional actions. The rest of this section summarizes the views presented at the conference.

Session I: New and Improved Output Measures

Overall, participants endorsed BEA's plan to feature a measure of real GDP that avoids substitution bias. However, some participants were concerned about not having real GDP measures in which the components add to the totals, as is the case with the currently featured measure, which is based on fixed weights. Participants urged BEA to open a broader discussion with users on alternative measures of real GDP as the plan is implemented and to begin briefings, with attention to users' analytical and forecasting needs, on the new measure over the coming months.

BEA's quality-adjusted price indexes for computers, introduced in 1985, have caused problems for some users, particularly econometric modelers. However, most participants felt that BEA had made important progress when it introduced these hedonic indexes and that now it needs to develop improved price/output measures for other areas of the economy. There was some difference of opinion on the focus of these efforts. Among the views expressed were the following:

Other participants favored some combination of both courses. The consensus seemed to be that BEA should move forward, and several participants urged BEA to seek out partnerships with business and academia to draw on expertise and interest that would reinforce BEA's own efforts.

One of the clear themes at this session was the need to update and fill gaps in coverage, particularly those in services. (This same theme was echoed by the Vice Chairman of the Federal Reserve Board in his talk at lunch.) Although some suggested that partnerships with the private sector and use of existing private data might moderate the necessary increase in respondent burden, there was a recognition that new surveys of services would probably be required.

Several participants stressed the need for a frequently updated industrial classification and for more timely and better integrated industry accounts.

Among the other output-related steps in which participants expressed an interest were the following: Improving seasonal adjustments for volatile components and moving closer to international guidelines, especially the recently revised System of National Accounts (SNA). In addition, charging more for BEA's information to help fund the economic accounts and establishing a regularized process for internal and external review of the accounts were mentioned.

Session II: Better Measures of Investment, Saving, and Wealth

Despite general recognition of the empirical and conceptual difficulties involved, there was consensus on the need for more comprehensive measures of investment. Participants placed special emphasis on adopting measures within the context and discipline of the SNA. In addition, for investment estimates having a degree of uncertainty, or error, several orders of magnitude higher than that for estimates now in the accounts, participants thought satellite accounts would be the appropriate framework and that some indication of the degree of uncertainty associated with the estimates should be given.

More specifically, the following points were made:

Some participants called upon BEA to go beyond the SNA: The SNA was seen as a good first step in expanding and updating the accounts, but the need for an expanded analytical framework dictates that BEA not stop there. For example, BEA should ultimately go beyond simply counting government investment and depreciation to the development of estimates of the service value of government capital.

Participants were in widespread agreement on the need for improved (more market-based) measures of depreciation and capital stocks, as well as for better integration of existing estimates: Estimates of investment, saving, and wealth in BEA's accounts and in the Federal Reserve Board's flow-of-funds accounts, as well as estimates by BEA of capital stocks and those by the Bureau of Labor Statistics of capital stocks and capital services. Such integration and improvement in the accounts was deemed especially important given the shift in attention from shorter term stabilization issues to longer term issues dealing with productivity, growth, and competitiveness.

In addition, several participants urged a review of BEA's treatment of government interest, and several expressed particular concern that issues dealing with private saving and the government deficit be addressed.

Session III: Filling Gaps in the Coverage of International Transactions

There was strong support for improving the measures of international transactions. The most widespread support was for better and more detailed estimates of trade in goods and services, especially when new products, new markets, or new transactors cause difficulties in making (nominal and real) estimates.

With respect to capital flows and positions, there was consensus on general priorities in coverage, but some difference about the kinds of data that should be assembled by BEA.

As mentioned, several of the suggestions were for additional detail or more frequent information. Among them were trade data on an establishment basis to supplement the residence-based data, detail on trade by State, quarterly (rather than only annual) estimates of the international investment position, and country detail on capital flows.

Session IV: Improving Statistics in a Resource-Constrained World

Most of the discussion focused on how BEA—and Federal statistical agencies in general—could operate more effectively. Several points echoed those made earlier in the day: Tapping into private-sector data, expanding use of electronic data collection and interchange, and charging more for Federal data. With respect to the relations among the Federal statistical agencies, some participants urged closer cooperation, including data sharing; others believed that consolidation of the agencies was the preferred option. Suggestions were made by several participants and by the Vice Chairman of the Federal Reserve Board about reducing resources from statistical programs in other agencies to support work in services and other high-priority areas.

Refined Plan and Next Steps

Table 1 summarizes the final version of BEA's Mid-Decade Strategic Plan. In view of the consensus among users regarding the elements in the draft strategic plan, the final version differs little from the draft. As noted above, participants at BEA's conference mainly suggested differences in emphasis and priority to be placed on the various elements of the plan. In the area of output, for example, more prominence has been given to services; in investment, saving, and wealth, greater emphasis on expansion and improvement within the structure of the SNA; and in international transactions, higher priority to services and conventional financial transactions. However, given the general nature of the strategic plan, the priorities expressed by users are better seen in the steps laid out in the goals and milestones presented in table 2 and the description that follows of the steps to be taken in the next year. These steps are divided among the major areas outlined in the strategic plan.

New and improved measures of output

Real GDP.—This year, in its comprehensive (benchmark) revision of the national income and product accounts (NIPA's), BEA will replace its fixed-weighted index as the featured measure of real GDP with an index based on the chain-type annual-weighted index that BEA introduced in 1989 and began publishing in 1992 as an alternative to the fixed-weighted index. (BEA will also replace its fixed-weighted price index with a chain-based price index.) BEA's schedule calls for release of the comprehensive revision by the end of 1995.

The chain-based index is superior to the fixed-weighted index in that it allows for changing relative prices and production patterns and thus provides unbiased comparisons of economic activity over long periods of time. Because it allows for regular updating of output and price weights, the chain-based index also has the advantage of eliminating a major source of the revisions in real GDP and price growth that occur as the fixed weights are updated at 5-year or longer intervals.

In order to understand users' analytical needs more completely and to brief users on the characteristics of the chain-based indexes, BEA will conduct a series of briefings on the tradeoffs among various alternative measures of real GDP for major user groups. In addition to these briefings, BEA will publish a series of articles in the SURVEY OF CURRENT BUSINESS, beginning this summer, that describe the new measure of real GDP and other aspects of the upcoming comprehensive NIPA revision. This summer, BEA will expedite the release of its existing chain-type annual-weighted index to include it in the regular GDP news release. Finally, immediately preceding the comprehensive revision, BEA will conduct further news media briefings on the new featured measure.

Quality adjustment and definition of output.—BEA will seek to establish partnerships with users of the accounts, with the Bureau of Labor Statistics and other Federal agencies, and with international organizations to develop coordinated work plans for developing new methods and concepts for measuring changes in output and prices in difficult-to-measure goods and services. For components of GDP that appear to be amenable to hedonic and other methods for separating price changes from quality changes and for which adequate commercial data are available, BEA will work with its private and public partners to develop new output and price indexes. For difficult-to-measure services—such as banking, insurance, financial and legal services, and management consulting services—BEA will work with its partners to develop new concepts and definitions.

Updating and filling gaps in services and other industries.—This year, the Census Bureau began releasing data from the 1992 Economic Censuses, including data from those service industries included for the first time. The expansion of the Censuses was the largest in over 40 years, adding over 90 new service industries. Incorporation of these data will significantly improve services coverage for BEA's input-output tables, and data from the transportation, communication, and public utilities industries collected as part of the Censuses services expansion will be used this fall in constructing the "make" table for the 1992 benchmark input-output table. Although further detailed data from the Censuses on the new service industries will be required to utilize these new data directly in the comprehensive NIPA revision, BEA will explore means of utilizing the data that are currently available.

Beginning this fall, the Economic Classification Policy Committee (which is composed of BEA, the Census Bureau, and the Bureau of Labor Statistics), working with Canada and Mexico, will finalize the proposed North American Industry Classification System (NAICS) and present the proposed structure to users for comments. NAICS will provide an updated and more consistent classification system, particularly in the areas of services, new and emerging industries, and high-technology industries.

Better measures of investment, saving, and wealth

As part of its comprehensive revision of the NIPA's, BEA will move toward a more comprehensive and consistent treatment of investment and capital by introducing the SNA treatment of government purchases of structures and equipment as investment and by introducing better theoretically based estimates of depreciation and capital stocks. These estimates will be the first steps in expanding and improving BEA's investment and capital stock estimates. The next steps will include further conceptual and empirical work on topics such as investment in computer software, better empirically based estimates of depreciation, the services of government capital, and consumers durables. BEA will also work on extending the concept of capital formation for investments such as R&D and natural resources within the structure of the SNA's system of satellite accounts.

Filling gaps in the coverage of international transactions

Services and other trade flows.—BEA will complete tabulation of its new benchmark survey of international trade in financial services and will incorporate the results in the June 1996 annual revision of the balance of payments accounts. BEA will also continue its work with the Census Bureau to develop market-value estimates for exports and imports of computer software.

Capital flows and positions.—BEA will continue its coordinated work with other countries, international organizations, and the U.S. Treasury Department to improve estimates of capital flows and stocks, with special emphasis on Treasury's new benchmark survey of U.S. portfolio investment abroad, on extending existing data exchanges, and on developing measures and new and revised surveys for collecting data on new financial instruments.