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Wednesday, July 02, 2014

'GDP: Seasons and Revisions'

An important reminder about the interpretation of GDP data:

GDP: Seasons and revisions: Growth from the fourth quarter of 2013 to the first quarter of 2014, originally thought to have been about +0.1% in April, was revised last week to –2.9%. That’s at a seasonally-adjusted, annualized rate (SAAR)... News reports varied between shock and concern. Was the anemic recovery over? Or, was it just that this winter was especially harsh?
In reality, these headline growth numbers simply don’t contain all that much information for real-time business cycle analysis. There are many reasons, but two deserve special attention: (1) the statistical noise created by seasonality; and (2) the propensity to revise GDP many years after the period being measured.
Seasonality in GDP is enormous... The seasonal adjustments swamp the small changes in the adjusted growth rates..., in the first quarter of every year ... the level of output plunges on average by 18 percent! ... The point is that it is difficult to extract the useful signal – the SAAR economic growth rate that we care about – from the noisy unadjusted GDP data. ...
Next there are revisions – lots of them. ... And, the changes can be quite big...
Statistically, the revisions to economic growth for quarter t between the t+3-month estimate (which we just received last week for the first quarter) to the t+10-year estimate (which will not be available for nearly a decade) have ranged from minus 6 percentage points to plus 7 percentage points over the past 40 years, with a standard deviation of about 2 percentage points. Put differently, there remains a good chance that some of this reported decline will be revised away. We might even wonder whether the economy contracted at all last winter. ...
That’s why so many observers who care about the cyclical state of the economy turn to data other than GDP – like U.S. labor market reports – that are available quickly and revised quickly, too.

[The full post has more details and examples.]

    Posted by on Wednesday, July 2, 2014 at 10:55 AM in Economics | Permalink  Comments (6)


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