Happy talk media today are whooping it up because real GDP grew by 2.5% in the third quarter. News flash: it’s the advance GDP estimate, stupid!
Don’t take my word for it. Read the first two paragraphs of the press release from the Bureau of Economic Analysis:
“Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.5 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 1.3 percent.
The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The “second” estimate for the third quarter, based on more complete data, will be released on November 22, 2011.”
Prediction: this estimate will be revised downward twice — once at the end of November and a second time just as we’re about to welcome in 2012.
I was wondering if you could elaborate on this a bit more. Why would there be two revisions instead of one? Thanks.
No problem. Since as long as I’ve been an economist (long before the earth had cooled — we rode dinosaurs to class in graduate school), the Bureau of Economic Analysis (BEA) has released three estimates of each quarter’s GDP. These estimates used to be called “Preliminary,” “Revised,” and “Final.” But even the final estimate was subject to occasional revisions when the BEA examined new data from the distant past (2 years or more). The three estimates are released as additional data becomes available. For example, the preliminary estimate is based largely on data from corporations and other entities that must report data to the government frequently. This data includes 10-K and 10-Q filings with the SEC, payroll and employment data with the IRS, and so on. The revised estimate includes a broader base of economic activity as data comes in from entities that report less frequently — large partnerships, and so on. The final estimate includes all data available three months after the end of the quarter. But even that estimate does not include data reported only once a year, usually with individual tax returns. A good example is proprietorships (like my business) and partnerships that report once a year on their tax returns. This data is the basis for the occasional revision many years into the past. In fact, the BEA does another revision once a year and a “benchmark” revision of historical data about every ten years.
Note that the three estimates are issued one, two, and three months after the end of the calendar quarter.
For whatever reason, a few years ago the BEA decided to rename the three estimates. Preliminary is now “advance,” revised is “second” and final is “third.”
The BEA is remarkably transparent about their methodology. Listed below are a few links for anyone who is really data-obsessed and wants to read about the details. (Tip: if this really interests you, then you may have a career in the National Income and Product Accounts (NIPA) section of the BEA.)
NIPA Annual Revisions with Details (2010)
Above with excruciatingly detailed explanation:
Why has the initial estimate of real GDP for the fourth quarter of 2008 been revised down so much?