One Reason Why Unemployment is Dropping

It’s difficult to reconcile the sharp drop in the unemployment rate with the relatively slow growth in measured real GDP. Some have criticized the unemployment statistics, worrying about an Obama ‘conspiracy’ to cook the unemployment books.

But an alternative explanation is that the government is underestimating the growth rate of real GDP by undercounting the strength of consumer data consumption. A new paper from PPI, Beyond Goods and Services: The (Unmeasured) Rise of the Data-Driven Economy, makes the case that consumer consumption of Internet-related activities–email, video, social media, games, maps, and so forth–is rising much faster than the BEA numbers show. Once we correctly adjust for consumer data consumption, real GDP growth goes up about 0.6 percentage points.

So if the official GDP growth for the 3rd quarter is 2%, then the actual growth growth, adjusted for consumer data consumption, may be closer to 2.5%. That may help explain the drop in the unemployment rate.

To see why the BEA is underestimating the strength of consumer data consumption, take a look at the chart below. This chart, drawn directly from BEA data, tracks real consumer purchases of “Internet access”–both mobile and wired.

Please note that according to these BEA figures, Americans are consuming less internet access in real terms than a year ago. That can’t be right. To put it a different way, the official GDP statistics are describing a world in which Americans are retreating from the Internet. That’s not the world we live in.

Because this is “real” consumption, the effect of price changes is already taken out of the statistics. And as we explain in the paper, the “missing” internet access does not show up anywhere else.

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