Friday, April 26, 2013

Inside the GDP sausage factory

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It's useful to be aware of the difficulty of measuring the US economy. Those interested in today's advance GDP report might do well to look through this, a handbook about the concepts and methods behind US income and product accounting. GDP estimates are constructed from a combination of many datasets, most of which are produced by the Census Bureau but some of which come from BLS, BEA, the Department of Agriculture, Treasury, IRS, OMB, and state governments. Putting everything together is quite a task. "The source data available to BEA are not always ideal for the preparation of the NIPAs" (3-2).

The most reliable GDP estimates are based on the Economic Census, which occurs every five years. Between censuses, statisticians must rely on surveys that have sampling properties chosen based on, well, the most recent Economic Census (and the Business Register, which forms the backbone of many business datasets). Advance estimates are basically built entirely on survey data.

Today we see the advance estimate for 2013Q1 GDP. Here's what the handbook says:

For most of the product-side components, the [advance] estimate is based on source data for either 2 or 3 months of the quarter. In most cases, however, the source data for the second and third months of the quarter are subject to revision by the issuing agencies. Where source data are not available, the estimate is based primarily on BEA projections. (3-7)

The components for which only 2 months of data are typically available include several categories of construction, inventories, exports, and imports. Missing data have to be filled in somehow, and the solution will probably be something based on trends--so it may sometimes be difficult for advance estimates to catch turning points. Also, a rough rule of thumb might be that data frequency and data quality are negatively related (not to mention that survey quality may decline as time since the last Economic Census increases). In short, advance estimates require a lot of guesswork.

And this is to say nothing of the microdata. Survey microdata can be pretty nasty.

The people at BEA have a pretty tough job. It is therefore not surprising that GDP sometimes receives pretty big revisions. Advance data should probably be taken with a grain of salt.

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