US GDP grew by 4.1% in the second quarter, according to a fairly wild guess by statisticians

Just doesn’t seem right.
Just doesn’t seem right.
Image: Reuters/James Lawler Duggan
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The US economy grew by 4.1% in the second quarter, according to the Commerce Department. The data published today suggest a strong economy that, at least in the short-term, has been buoyed by federal tax cuts passed late last year.

But it is important to remember that this number might not hold up. Recent history suggests that there is a one-in-four chance that the US economy actually grew by more than 5.2% (today’s result plus 1.1 percentage points), and also a one-in-four chance that it grew by less than 3.6% (today’s result less 0.5 percentage points). Revisions to GDP data are routine and sometimes significant.

Consider that in April 2015, the Commerce Department announced that the US had only grown by an annual rate of 0.2% in the first quarter of that year, according to the first estimate of GDP, like the one released today. Major business news sites wrote that this was a sign of a “sluggish,” “stalled out” economy.

Then, a funny thing happened. Over the next several years, the Commerce Department repeatedly updated their estimate of growth in that quarter, based on new data. Eventually, it found that growth had actually risen by a robust 3.2%. That’s not very “sluggish.” The hefty revision was unusually large, but adjustments are normal. Between 2002 and 2015, on average, the initial estimate of GDP is off by one percentage point from where the number eventually settles after all planned revisions.

Why are the numbers so off? A lot of missing data. When the Commerce Department reports the initial GDP growth figure, its analysts only have access to about 25% of the information (pdf) they need for complete accuracy. The rest of the estimate is based on trend analyses, using proxies for the actual data. For example, the number crunchers use new houses under construction as a proxy for estimating the amount of money invested in new home construction (paywall).

The estimate is steadily updated as more of the actual data comes in over the subsequent quarters and years. Today’s GDP release also included a comprehensive update of data going back to 1929.

So let’s not get too excited about today’s numbers. They may not be what they seem.