'Knowledge Economy' Will Soon Count As Investments - Making The US Economy Look Better

So it is rather odd that official data suggests American businesses for decades have been growing less aggressive at investing in their operations.

This apparent contradiction helps illustrate a rethinking under way on how to measure economic output, a discussion that is leading to an overhaul of government data this week that will show the U.S. economy is a bit larger than previously thought.

The idea is that while companies might be spending less of their income on tangible things like buildings and equipment, they appear to be spending more than ever on ideas, such as the engineering research behind an automated factory.

Private spending on research and development has roughly doubled as a share of investment in the last 50 years. The thing is, it doesn't actually count as investment, so America's output of cancer drugs adds to economic growth but the research to develop them does not.

This will change on Wednesday when the Commerce Department releases decades of revised data that will include R&D as a category of investment. Under the new framework, R&D added about $300 billion to GDP in 2010.

"It's gotten to be an even bigger part of the economy, so it's incumbent on us to incorporate it," Steven Landefeld, director of the department's Bureau of Economic Analysis, said in an interview.

Money spent creating enduring artistic products like movies and books will also now count as investment. Adding up the full revisions will add nearly 3 percent to the size of America's economy, the BEA says.

This could give the impression of the government waving a magic wand to make the economy look larger. However, the United States will not be alone in adopting the new methodology. Government statistical agencies from around the world agreed to new standards for measuring economic growth as part of a 2008 agreement at the United Nations. The European Union will start counting research and development as investment in 2014.

Also, some prominent researchers say the BEA if anything is low-balling the spending in the knowledge-based economy, which has increased in parallel to the rapid advance in information technology.

STILL TRYING

Economists Charles Hulten of the University of Maryland and Carol Corrado at the Conference Board have put numbers on a more expansive list of intangible investments, including brand-building, employee training and spending by companies to make their operations more efficient.

Their tallies, which are meant to be preliminary, take a stab at quantifying investments in innovation and would add $1 trillion to the economy's size, Hulten said.

The extra output would add only a few tenths of a point to the U.S. annual economic growth rate. But if the estimates are accurate, they might take the edge off a worrisome trend in which America's total stock of private fixed assets has grown at ever slower rates for much of the last 50 years.

Hulten and Corrado have found, for example, that investments in the knowledge economy appear to be rising steadily, offsetting a decline in spending on tangible assets.

At the very least, businesses are still trying hard to improve their productivity.

"It bolsters the case for optimism about the future of the U.S. economy," said Hulten.

One way to see the increased role of innovation in the economy is through the broad changes in the workforce.

"Data analyst" has become a relatively common profession, while companies spend more than ever on managers, presumably because they come up with ideas to improve efficiency. About 16 percent of current jobs are management positions, up from around 10 percent in the late 1960s.

Landefeld said the BEA would like to measure more of the knowledge economy, but points out that it has taken decades to accumulate enough data to reliably gauge R&D spending.

The last big addition to the BEA's investment accounting was in 1999, when it classified software as an investment.

Someday, the agency might expand the R&D category beyond science and engineering to include product design, which would include, for example, Apple's spending to make the iPhone look cool. It also makes sense to think of spending on business consultants as an investment, as the aim of the spending is usually to improve profitability.

Reliable data, however, is not yet available for either option.

"They are sort of glimmers in our eye," Landefeld said.

(Reporting by Jason Lange; Editing by Andrea Ricci)