Today’s second estimate of GDP for the second quarter of 2011 showed that growth was revised down from 1.3 percent to 1.0 percent. BEA revises its GDP estimates frequently, but that’s actually a good thing for policy makers, because revisions incorporate new and better information that becomes available. And that provides a better understanding of what's actually happening in the economy.
Recently, a couple of articles and blogs have criticized BEA’s revisions to GDP, particularly its estimates of GDP during the most recent recession. I understand the frustration. Clearly, the better we understand a problem, the better our solutions will be.
But GDP revisions are unavoidable, because the earliest estimates, while important for making policy decisions, especially if the economy is beginning to head in the wrong direction, are not made with complete information.
Let’s take a moment to clear up some of the confusion about these revisions.
Here are the facts:
1) The recession was greater than the numbers showed at the time and the economy’s expansion was a bit less. But the revisions did not change the timing of the contraction. The overall pattern of changes during the downturn was similar in both the revised and previously published estimates, with revised estimates showing larger decreases for 2008:Q4 (-8.9 percent compared with -6.8 percent) and for 2009:Q1 (-6.7 percent compared with -4.9 percent). It’s not always the case, though, that GDP gets revised substantially downward during recessions. While GDP from the 1990-1991 recession was revised down a couple of tenths, GDP from the 2001 recession was revised upward by a couple of tenths. So you never know; next year’s revision to the recent recession could paint a less severe picture than the current revision, as has happened in the prior two recessions.
2) The data on hand in real time when BEA released its initial estimates of GDP for the end of 2008 and into 2009 didn’t suggest that the economy was plummeting as quickly as we believe it was today. Given that we don’t have definitive answers as to why the data didn’t initially show such a steep decline, I can only speculate, but we continue to investigate why this was the case to make sure that next time we are better prepared. With that caveat in mind, data collection during recessions can be more difficult. Some firms go out of business, some only partially complete surveys, and some choose not to respond at all, posing significant challenges to the accuracy of source data used to produce early GDP estimates. The U.S. economy is made up of more than 6 million employer businesses that span thousands of industries. Keeping track of what is happening in real time is a daunting challenge, especially as we try not to overburden the business community with providing information.
3) BEA follows well-established international standards in computing GDP estimates and is well-recognized as the best in the world for accuracy and timeliness. The fact that GDP gets revised isn’t news – everyone expects revisions. The methods that BEA uses are posted transparently on its website and noted in each press release it issues on GDP [3]. Here’s how I think about it: BEA follows a formula in computing GDP – it’s a very, very complicated formula with thousands upon thousands of components. We’re talking about a formula that goes well beyond anything an Excel spreadsheet could handle. Over time, we get better estimates of some of those pieces, which help to generate the revisions. And along with BEA, many economic experts also compute revisions. There is extensive academic literature on the topic (a branch of which is known as “real-time data analysis”).
As many outside economists and GDP experts will attest to, the integrity of BEA’s data and its recent revisions to the latest U.S. recessionary period should not be suspect. But there is always room for improvement, and BEA and the Commerce Department continue to search for ways to improve its data collection and analysis to best serve the American people.
- Mark Doms, Chief Economist, Department of Commerce
August 26, 2011