In late June, the Bureau of Economic Analysis (BEA) reported that the economy grew at a 1.9 percent annual rate in the first quarter of 2011. This, our third estimate for the quarter, turned out to be lower than our initial estimate of a 2.2 percent growth rate made in late April. When we revise a major economic indicator, it’s not unusual for some to ask us, “Why didn’t you get it right the first time?”
It’s not that the earlier estimate was wrong. Rather, it’s the result of a delicate balancing act BEA performs to simultaneously achieve the two most important qualities of its estimates—accuracy and timeliness.
The public wants accurate data and wants it as soon as possible. To meet that need, BEA publishes early estimates that are based on partial data. Even though these data aren’t complete, they do provide an accurate general picture of economic activity. They capture the direction and trends of various components of the economy, providing valuable information that businesses and government leaders depend on and react to. They provide an “early read” on what’s happening in the economy.
Although the revision process is complicated, we make it systematic and transparent. BEA produces three estimates of gross domestic product (GDP) for a given quarter. Each includes updated, more complete, and more accurate information as it becomes available. The first, called the “advance” estimate, typically receives the most attention and is released roughly 4 weeks after the end of a quarter. For example, the first estimate of GDP for this year’s January-to-March quarter came out near the end of April. The first estimate for the second quarter will come out July 27.
That advance GDP estimate offers the first comprehensive picture of how the economy is performing in a specific quarter. It gives a pretty accurate picture of whether the economy is slowing down or speeding up and which components of spending are responsible for those changes. It tells us the pace at which shoppers are shopping and what they are buying. It also tells us what businesses are producing and investing in, what government is spending, and how much we are buying and selling abroad. It also tells us about trends in key variables, like saving and inflation.
When BEA calculates the advance estimate, the Bureau doesn’t yet have complete source data, with the largest gaps in data related to the third month of the quarter. In particular, the advance estimate is lacking complete source data on inventories, trade, and consumer spending on services. Therefore, BEA must make assumptions for these missing pieces based in part on past trends. As part of this process, we publish a detailed technical note that lays out the assumptions made for a particular estimate. BEA also publishes detailed materials on the standardized procedures and methods used in the various vintages of the GDP estimates.
As new and more complete data become available, that information is incorporated into the second and third GDP estimates. About 45 percent of the advance estimate is based on initial or early estimates from various monthly and quarterly surveys that are subject to revision for various reasons, including late respondents that are eventually incorporated into the survey results. Another roughly 14 percent of the advance estimate is based on historical trends.
By the second GDP estimate, we have new data for the third month and revised data for earlier months. By the third estimate, a lot more data is available so that only 17 percent of the GDP estimate is based on information from the first set of monthly and quarterly surveys.
The revision process doesn’t end with updates to the quarterly estimates. Toward the end of every July, BEA releases the results of its annual revision with even more complete and detailed data for GDP estimates for the past 3 years. In addition, once every 5 years, BEA conducts what is known as a “comprehensive” revision that encompasses the entire GDP series back to 1929. New data, new methodologies, changes in definitions and classifications, and changes in presentations are all incorporated into the comprehensive revision. All those changes are designed to more accurately portray the evolving U.S. economy.
Last year, BEA introduced yet another revision method known as the flexible annual revision. This new option allows the Bureau to make an annual update to specific parts or even an entire series without having to wait for the next comprehensive revision cycle.
Even though GDP estimates are revised over time as more complete and accurate data become available, studies show that the general picture of economic activity does not change:
• The overall pattern of change in GDP over business cycles is little changed by revisions.
• Revisions to long-term growth rates are small, averaging less than 0.1 percentage point for average growth rates between 1985 and 2009.
• There are no substantial revisions—as measured by shares of GDP—in key measures such as investment, government spending, or the national saving rate.
Measuring GDP for the U.S. economy is always a work in progress. Because BEA faces so many challenges in measuring GDP, our estimates are informative, but never really final. Our advance estimates strike a good balance between accuracy and timeliness, given the data available at the time. Successive revisions reflect BEA’s commitment to incorporate both more complete source data when they become available and improved methods for measuring a rapidly changing economy.