Maybe the glass is half full. No, check that: Maybe it's actually three-quarters full, and we've been measuring it wrong for years.
That is the argument of some thinkers who think we habitually underestimate the pace of economic expansion. They contend that lacklustre figures for GDP growth in developed countries – such as the dismal first-quarter numbers for Canada and the United States – aren't telling the real, more positive story.
If they're right, many of today's most heated economic debates take on a new shape. It's possible that output is growing faster than we realize, that the famously oppressed middle class is actually doing just fine and that central banks can keep rates at ultralow levels for longer than most people think.
Ken Rogoff, a professor of economics at Harvard University, is one of those who believe the dreary picture painted by official numbers is unrealistically glum. Many positive developments aren't reflected in government statistics, he says.
For instance, middle-class consumers can now tap into "a treasure trove of music, films and TV that would have been unimaginable 25 years ago." People have easy access to statins, ibuprofen and other medications that earlier generations never enjoyed. And they can Skype to far-off friends and families at next to no cost, while keeping in touch through Facebook and Twitter.
Those improvements in day-to-day life tend to be missed by official data gatherers since they're advances in quality or in functionality, rather than straightforward increases in the production of standard, tangible goods. "Overall, it is quite likely that measured GDP growth understates actual growth, especially when measured over long periods," Prof. Rogoff writes. "It is quite possible that future economic historians … will evaluate ours as an era of strong growth in middle-class consumption."
In a similar vein, Jan Hatzius, chief economist at Goldman Sachs, argued in a report last month that productivity growth may be underestimated because official calculations don't capture the full benefits of technology, from better smartphones to improved shopping through online merchants.
Martin Feldstein, also a professor of economics at Harvard, added his support for the notion in a recent commentary in The Wall Street Journal. "The official statistics understate the growth of real GDP, of productivity, and of real household incomes," he wrote.
His contention is that government statisticians underestimate growth because they overestimate inflation. Number crunchers think prices are rising faster than they really are because official data don't fully adjust for the improved quality of goods, particularly in technology and health services.
If inflation is lower than official estimates, the U.S. Federal Reserve and the Bank of Canada should feel less pressure to raise rates to get ahead of any potential surge in prices. Also, at least some of the anguish over this slow-motion recovery goes away, since economic growth may actually be faster than we think.
However, not all economists believe we're mismeasuring the economy. Paul Ashworth of Capital Economics says official numbers may underestimate the full impact of Facebook and Twitter, but other trends pull in the opposite direction. The move towards a cashless economy, for instance, cuts down on unreported cash transactions and brings more of the underground economy into the light, where it can be recorded and weighed.
"All things considered, we doubt that the real GDP growth figures are seriously biased in either direction," he says.
The debate over how to measure growth is particularly heated right now because investors are struggling to make sense of a baffling U.S. economy. According to the official numbers, GDP sank in the first quarter, even as new claims for unemployment insurance fell to rock-bottom levels – a highly unlikely combination.
A new tool called GDPplus, introduced by the Federal Reserve Bank of Philadelphia, offers one way to bridge the gap between the drab GDP numbers and the far rosier employment picture. GDPplus uses advanced math to extract what its creators believe is a more reliable signal of underlying growth than the standard expenditure-based GDP model.
By its calculations, U.S. GDP grew at a relatively peppy annualized clip of 2.0 per cent in the first quarter, rather than the dismal 0.7-per-cent decline of the official numbers. The higher number would square far more neatly with the brightening employment picture.
Policy-makers, including John Williams, president of the San Francisco Fed, are already citing GDPplus in speeches. Investors who want an alternative read on the state of the U.S. economy should take a look too.