Should GDP Revisions Make a Difference?


Once upon a time, a small revision in the GDP growth rate led to a very different newspaper storyline. Just remember that this is an all-too-real fairy-tale...

One month ago, on April 29, I defended my dissertation about error in GDP. That day the headlines were screaming that the economy was in the tank. The quarterly annualized growth rate of Q1 GDP had come in at 3.1%. Jeannine Aversa of the Associated Press wrote:

[T]he economy grew at an annual rate of just 3.1 percent in the first quarter. The slowest pace of expansion since in two years was evidence of a new "soft patch."

The first-quarter's GDP figure, down from a 3.8 percent pace logged in the final quarter of 2004, represents the economy's most sluggish showing since the first quarter of 2003, when economic activity expanded at an even more mediocre 1.9 percent rate...

The newest snapshot of the economy disappointed economists. Before the report's release, they were forecasting a 3.5 percent growth rate for the first quarter...

["Soft Patch" is] the term Federal Reserve Chairman Alan Greenspan used last spring when economic growth slowed abruptly.

Today, Q1 GDP was revised upward to 3.5%, and Jeannine Aversa has found a new story:
"The 3.5 percent pace is really a safe and solid pace for the economy to grow. By that I mean, it is not so fast that you can have an inflationary accident and not too slow to create new jobs," said Stuart Hoffman, chief economist at PNC Financial Services Group. "It is right on the economy's speed limit."
Folks, 3.1% and 3.5% are economically and statistically indistinguishable. If you don't believe me, ask somebody from the BEA. There is almost no difference in the data, yet the story goes from "soft patch" to "safe and solid". This is not reporting reality; this is from the land of make-believe. Quite simply, GDP data aren't able to tell coherent stories with differences this small, especially when comparing two recent quarters.

Here's more:

The new reading is close to the 3.6 percent growth rate that economists were forecasting before the release of the GDP report.

The 3.5 percent pace clocked in the first quarter of this year _ while better than an initial calculation for the quarter _ still represented some slowing from the 3.8 percent pace seen in the final quarter of 2004.

Economists initially predicted 3.5%, and it came in at 3.1%. The next month, they predict 3.6% and it comes in at 3.5%, and this is slightly lower than the 2004Q4 of 3.8%. A few points are worth noting. First of all, these are very good predictions. Second of all, 2004Q4 growth itself was revised from an "advance" 4.0% to a "preliminary" 3.1% to the "final" 3.8%. Do you really think stories about short-term changes from 4% to 3% growth have any basis in reality? Third, what can stories based on these data possibly mean? Nothing. Absolutely nothing.

I cannot see how anybody's planning decisions have changed because of this revision. As a subjective rule, I cannot see how any revision smaller than +/-1.5% or +/-2% could affect public or private policies at all.



I think the term for what Aversa is doing, is "interpreting the noise."

The entire industry of "forecasting" monthly and economic data is a "suckers" game created by the brokerages house to generate volume.

The brokers do not really care if the market is up or down, they take their slice either way.
What they want is volume, so if they can get "greater fools" to bet on monthly data they love it.


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This page contains a single entry by Kevin published on May 26, 2005 10:16 AM.

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