Apparently all our data is wrong

So Mark Thoma points us to an article in Business Week showing that real GDP growth may have been greatly overstated recently as a result of failure to properly measure import prices.

But new evidence suggests that shifting production overseas has inflicted worse damage on the U.S. economy than the numbers show. BusinessWeek has learned of a gaping flaw in the way statistics treat offshoring, with serious economic and political implications. Top government statisticians now acknowledge that the problem exists, and say it could prove to be significant.

The short explanation is that the growth of domestic manufacturing has been substantially overstated in recent years. That means productivity gains and overall economic growth have been overstated as well. And that raises questions about U.S. competitiveness and "helps explain why wage growth for most American workers has been weak," says Susan N. Houseman, an economist at the W.E. Upjohn Institute for Employment Research who identifies the distorting effects of offshoring in a soon-to-be-published paper.

The underlying problem is located in an obscure statistic: the import price data published monthly by the Bureau of Labor Statistics (BLS). Because of it, many of the cost cuts and product innovations being made overseas by global companies and foreign suppliers aren't being counted properly. And that spells trouble because, surprisingly, the government uses the erroneous import price data directly and indirectly as part of its calculation for many other major economic statistics, including productivity, the output of the manufacturing sector, and real gross domestic product (GDP), which is supposed to be the inflation-adjusted value of all the goods and services produced inside the U.S.

If this is truly a significant problem, it also would result in an overestimate of the inflation rate. So whereas we (and the Fed) have all been operating under the assumption that the economy has been showing strong growth and high inflation over the last few years, the reality may have been just the reverse.

On top of this, Brad DeLong points to an article in the Financial Times to the effect that the BLS is failing to register what may be a big drop in construction employment.

During the past year residential construction activity has plunged, but employment in this sector has hardly declined at all – at least according to the official statistics.

... If it all fails to add up, the answer may be that the official statistics are not accurately capturing what is taking place in an industry that employs both a large number of small subcontractors and a large number of illegal immigrants. Specialty trade contractors – who work for small subcontracting firms – account for nearly two-thirds of all construction jobs. These workers tend to belong to small, often informal businesses.

The payroll survey is likely to understate the extent to which these workers have switched from the residential sector to fast-growing commercial construction.

Which means the BLS has been overestimating job growth, underestimating the unemployment rate, and overestimating productivity growth.

Then of course there's the debate over whether the trade deficit is overestimated due to failure to measure "dark matter" in the form of U.S.-owned assets abroad that generate income but are not recorded. The article is here.

I must not let my students learn of these things, lest they lose all respect for me and my profession.