Is GDP Set to Impute Homemade Skew?

Last month, a nerdy, kinda fringe endeavor went a bit more mainstream as news outlets took more notice of a 155-page report produced by Bard College’s Levy Economics Institute to support a Bureau of Labor Statistics initiative aimed at adding a measure of household production to broader consumer spending data.^[i] If this goes all the way from report to new data, it would fill one of the biggest gaps Simon Kuznets identified more than a half century ago when he formulated the National Accounts measurements that eventually became GDP: the omission of work done by women in the home, which goes unpaid but has obvious monetary value. And from pure insight purposes, cool! But in my view, this would make headline economic data even more squishy and less useful for investors—another reminder that deeper digging is absolutely necessary for investors.

Theoretically, GDP is the flow of all economic activity—all goods and services bought and sold, plus all public and private investments. But it isn’t actually a hard tally of all money changing hands. There are also some hypotheticals, or in econ jargon, “imputed” activity. One example would be agricultural production that is consumed by the farmer’s household rather than sold at the marketplace. Another is the much-derided owner’s imputed rent, which is the hypothetical amount a person would pay to rent their own home—a cost no one actually pays yet which is nevertheless included in consumer spending, GDP and the inflation basket. If the BLS’s initiative goes forward, you will probably start seeing a new category in consumer spending, like imputed domestic work or some such thing.

So the question is, do these imputed things actually add to the country’s economic output the way we have traditionally defined it? As in, would the data become more accurate if we add hypothetical transactions to the mix? Just my opinion, but I don’t think so. And I am not saying this for any particular political, sociological or ideological reasons. No, my views here are purely utilitarian. When you add imputed spending to the mix, you are creating a positive from a deliberate negative. In other words, you are counting as spending an activity that is expressly undertaken to avoid spending money. Consider the case of imputed rent: Someone whose house is all paid off has made the conscious financial decision to not have a monthly payment. Thus, imputing one is backwards.

So it is with a lot of domestic work, and here I will switch to personal anecdotes to avoid painting with broad brush strokes. When my grandmother was a stay-at-home mom in the mid-to-late 20^th century, she sewed most of her and her children’s clothes. Every summer, they would go to fabric stores and pick out textiles and patterns, and my grandma would spend the days sewing and tailoring their new outfits for the next school year. She elected to do this because it was cheaper (in money terms!) than buying new clothes for her brood of growing children. She made the conscious choice not to add to clothing retailers’ quarterly sales totals. Similarly, even once all the kids were grown and married, she and my grandpa still refused to go out to eat—too expensive, she said, and she could make it all better at home (she was correct). Another choice to deliberately keep some of their dollars out of a particular portion of the economy.

In a way, she was in competition with local businesses, and I have a strong hunch they saw it the same way. One entry in my oddball collection of antique cookbooks is a 1930s volume called, A Treatise on Cake Making: To Assist the Baker in Gaining the Cake Business Which Should Rightfully Be His. Published by Standard Brands (the umbrella company owning Fleischmann’s yeast and other pantry staples at the time), it was targeted at men who were trying to start commercial bakeries. Their main competitors, as portrayed in the book, were moms who make cakes for their children’s birthdays and other events. The text is all about how to put these moms out of business. (I guess Standard Brands presumed that by tapping into an entrepreneur’s inherent greed, they could probably get more revenue than they would from home bakers alone.) It was plain and direct: Work done in the home is lost activity; commerce that isn’t happening; revenue people are missing. Which means the reciprocal was also true: It was money households were deliberately saving instead of spending.

I can pretty easily frame my own home economic decisions in this light. When I mend clothes, I am denying some shop somewhere of a sale because I am repairing the old and worn instead of buying new. I am also depriving a tailor of revenue. Should my decisions to save money be counted as spending? Does doing so actually reveal anything more about the economy’s health than the simple absence of these sales does? I can apply the same logic to every garment I make and every cake I bake for church functions. When I cater an event pro bono, all parties have agreed no money will change hands, labor of love, etc. Some local baker is losing out on a potential sale of a few hundred bucks as a result. It is an anti-economic activity, if you will. An unbroken window, in Bastiat’s terms. And converting it to some fake imputed sale just seems weird.

This all probably sounds pretty abstract and unrelated to investing. But it comes into play now and then. You can see this in a couple of ways with imputed rent. As we have detailed over the past year, this category—which makes up about a quarter of CPI—is skewing headline inflation readings higher, obscuring that actual prices people pay for actual things are now pretty much bang on the Fed’s target.^[ii] Imputed rent fed into different fears in the mid-2000s, when the low savings rate spooked everyone into believing consumers were tapped out and borrowing hand over fist to continue unsustainable spending. But the number looked bad largely because spending included a big line item no one actually pays. In both cases, data added with the goal of improving transparency really just created a muddle.

Look, I am all for having more information on household production. If nothing else, it is just interesting to know where society is at and how that squares with popular perceptions. I am just skeptical that assigning monetary values to it and marrying it with actual spending will do anything to improve our collective view of how the economy is actually doing. In my view, if and when these new measures enter the consumer spending and GDP datasets, it means investors will just have one more reason to look beyond headline data points … one more thing to filter out.