When second-quarter GDP figures are released on July 31, the U.S. Bureau of Economic Analysis will be rewriting economic history. For the first time, research and development costs will be categorized on the government’s books as an investment. Since the government began recording GDP in 1929, R&D has been treated as an expense. In addition, original works of art such as films, music and books will be treated for the first time as long-lived assets. These assets will be assigned annual depreciation rates that will vary by asset type.
The revision will have an immediate effect. The BEA estimates that measured economic growth from 1959 to 2007 would have been 3.39% rather than 3.32%, a 2.1% increase. The U.S. is not the only country making this adjustment. The changes are being made to comply with the latest UN-agreed standards for national accounts. Canada made the change last year; the UK is scheduled to make it next year.
U.S. companies benefit disproportionately from the importance of intangible assets such as patents, copyrights, trademarks, designs, brand names and, more generally, know how. Examples can be seen by taking a look at the balance sheets of companies like Microsoft, Coca-Cola, Gilead Sciences and Disney. For these companies, property, plant and equipment account for 3%, 8%, 1% and 18% of their respective total market value. If investors review the growth companies held in their portfolios, they will note that they primarily consist of businesses that are largely beneficiaries of the knowledge economy.
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