The annual update of gross domestic product is coming soon. As it does every summer, the Bureau of Economic Analysis will revisit its earlier GDP estimates and other national data and make some changes. Does that mean the older numbers were wrong?
No, and here’s why:
Each vintage of GDP – whether it’s the earliest estimate for a particular quarter or an annual number – is based on the information available at the time it was made. As more complete and detailed data about a given time period flows in, BEA incorporates this new information to sharpen the previously released numbers.
On July 28, BEA will continue this cycle by releasing updated quarterly and annual GDP data covering 2014, 2015 and 2016, as well as the first quarter of this year. At the same time, BEA will release its first estimate of GDP for the second quarter.
Here’s how the cycle begins: Four times a year, about a month after each calendar quarter ends, BEA releases its first estimate of that quarter’s GDP. It’s produced by a team of about 100 economists using data that comes from a variety of sources, including government surveys and private data collectors. Even though they have thousands of data points to work with, there are still holes and gaps in the data that the economists must fill using statistical tools and analysis based on historical trends.
This first estimate, called the “advance estimate,” is best viewed as a snapshot of the economy, not a final product. Though preliminary, these snapshots are relied upon by policymakers, investors, business people and other Americans who value both the accuracy and the timeliness of BEA’s data.
In the next two months, the GDP estimate for that same quarter will be updated twice, each time using more complete and detailed information. The quarter’s estimate is likely to change somewhat as the new source data fills some of the gaps in the original dataset.
A similar process applies to the annual update each summer, just on a larger scale.
Just like with quarterly estimates, BEA’s economists use the best data they have to produce each year’s annual GDP estimate. As time goes on, more data become available from the Census Bureau, the federal budget, the IRS, and elsewhere. When they look back in the summer update, the economists use this information to build stronger estimates for past years and quarters.
In addition, BEA’s economists are continually looking for ways to refine and update their methodology. The annual update is usually the time when methodological improvements are made to GDP. Those improvements are then applied to previous estimates of GDP over past years and quarters to maintain consistency.
That’s how GDP numbers are updated every summer when BEA looks back.