September 10, 2002
When it comes to measuring the economy's health, the gross domestic product (GDP) is one of the most important statistics available. However, the GDP statistics undergo two revisions in the first three months after the initial release. The question arises: how well do initial projections predict final GDP?
Advance estimates of GDP are calculated with incomplete data from the quarter. A month later, preliminary estimates are released incorporating more data from the last month of the quarter. Even final GDP is subject to annual revisions, which have resulted in changes to prior GDP growth rates by more than 1.5 percentage points.
Citing the work of economists Karen Dynan and Douglas Elmendorf, a recent report concludes:
- From 1968 to 2001, the average revision of GDP growth from the advance to the final estimate was 0.67 percentage points.
- Revisions to estimates made near peaks in the business cycle were similar to those during the rest of the business cycle.
- However, estimates near troughs are revised quite a bit more.
Consequently, when it comes to detecting the end of a recession GDP estimates may not be good indicators. Using 2001 as an example, the report finds that:
- Advance and preliminary estimates of GDP growth for the third quarter of 2001 were -0.4 percent and -1.1 percent respectively.
- However, fourth quarter numbers were revised upward by 1.5 percentage points from the advance (0.2 percent) to the final estimate (1.7 percent).
- These revisions make it increasingly likely that the third quarter of 2001 was the only quarter with negative growth.
If this is confirmed, that means the U.S. economy never entered a recession, but merely suffered one quarter of negative growth.
Source: Abbigail J. Chiodo and Michael T. Owyang, "Subject to Revision," National Economic Trends, Federal Reserve Bank of St. Louis, June 2002.
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