The 3.5 percent upturn in GDP may not have actually happened; unseen events are at work

Here's a riddle: If a scientist or engineer is laid off, does it affect gross domestic product?

The third-quarter GDP figures, released on Oct. 29, showed the economy growing at a 3.5% annual pace, breaking a string of four consecutive negative quarters. The growth was driven mostly by a surge in the production of motor vehicles and other manufactured goods.

This number was greeted by many economists and journalists as confirmations that the recession is over. What's more, the rise in real GDP, combined with a sharp fall in employment in the third quarter, implies that productivity also soared during the period. Good news, right?

The trouble is that those GDP and productivity growth figures could be significantly overestimated—perhaps by one percentage point or even more.

That's because the official statistics are not designed to pick up cutbacks in "intangible investments" such as business spending on research and development, product design, and worker training. There's ample evidence to suggest that companies, to reduce costs and boost short-term profits, are slashing this kind of spending, which is essential for innovation. Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy. Yet you won't see that plunge reflected in the GDP and productivity statistics, which are still too focused on more traditional sectors, such as motor vehicles and construction.

In effect, government statisticians are trying to track a 21st century bust with 20th century tools. Not only is that distorting the critical data that investors, policymakers, and corporate executives use to evaluate the economy, but it might also be creating a false sense of relief as Americans battle a brutal recession.