THE ECONOMY Better than Anyone Thought

The current economic expansion is stronger than even the optimists have thought, and the U.S. is more prosperous than anyone has believed.

These facts emerged last week when an embarrassed U.S. Government admitted that its statistics have understated the size and strength of the economy by billions of dollars. In the first major revision in seven years, the Government restored those billions to the gross national product, that vital measure of all the goods and services produced in the nation. The economy has actually been expanding at an annual rate of 4.3% since 1960, said the Commerce Department, and not at the 4.1% rate that has been accepted up to now. Result: the gross national product reached $628.7 billion last year, $6.1 billion more than was previously believed, and was running at $666 billion a year in this year's April-June quarter -a full $8 billion above previous estimates.

Coming on top of the recent underestimation of the Government's tax take by $1.6 billion, the error in the widely used and quoted G.N.P. caused consternation among Government officials and economists, and raised eyebrows all around. The Bureau of the Budget has begun investigating the causes of the large miscalculations to see how they can be avoided in the future.

Out of Step. Some of the reasons are already clear. The Government takes a business census only once every five years; Congress keeps federal statisticians too starved for funds to make it more often. In a rapidly changing economy, five years is just too long for exact tracking. Important in the current revision are better statistics supplied by the new input-output study of what various industries sell to each other (TIME, Nov. 20) and fresh concepts of what should be included in the gross national product. The $1.2 billion a year paid in real estate commissions, for example, was reclassified from a current expense to a capital outlay, thus increasing G.N.P. by that amount.

Though many private economists and corporate planners will have to redo their homework as a result of the new figures, and though much of the Administration's tax and economic program has been based on the discredited statistics, the revision does not change any of the economy's basic trends. The revised G.N.P. showed that the peak of the 1958-60 expansion and the bottom of the 1960 recession occurred a quarter earlier than believed, lessons that are valuable mostly for Government economic planners. Says Arthur Okun, a member of the Council of Economic Advisers: "The new figures don't indicate that we would have followed any different policies. They do show that the economy's actual output -and potential -is higher than we thought."

"Regrettable" but Nice. In the course of revising the G.N.P., the Government's men made some other fascinating discoveries. One of them illustrates the vital role that increased consumer spending has had in the current economic advance; it shows, in fact, that consumer spending has risen faster than consumer income. The Government statisticians discovered that the consumer is spending more and saving less than anyone had thought, paying out 940 or 950 of each dollar instead of the 930 everyone had calculated. The difference alone means that in 1964 consumers spent $11.7 billion more than figured -an amount equal to about 12% of the national budget. The study also showed that corporations, on the contrary, are saving more and investing more of their profits. Industry's investment in capital equipment was $39.4 billion in 1964 instead of $35.1 billion, and corporate profits were $4.8 billion higher than estimated.

Despite the official embarrassment -"regrettable" was the key word in Washington last week -the changes make the statistics more useful than ever because they will enable companies to gear their production and sales effort more closely to how the U.S. economy is really performing. For U.S. workers they could even mean higher pay; some analysts expect that the higher G.N.P. may allow an increase in the Administration's wage guideposts from the present 3.2% to'3.3% or even 3.4% a year. In any case, the Government's economists were not alone in underestimating the vitality of the U.S. economy. Even the most bullish private forecasts of five years ago have turned out to be as much as 20% too low for new-car sales, 11 % too low for personal income and 12% too low for the G.N.P.

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