Like fireworks and baseball, BEA’s annual revision of GDP is a summer tradition. Toward the end of every July, the U.S. Bureau of Economic Analysis incorporates previously unavailable sources of data for the past three years into its estimates of the U.S. economy’s performance.
This year we will release the results of the 2014 annual revision of GDP and its components on July 30, bringing in new and revised source data for the first quarter of 2014 back to 2011. As part of a “flexible annual revision,” we will also incorporate the results of the comprehensive restructuring of BEA’s international transactions accounts, resulting in revisions to GDP and select components back to the first quarter of 1999.
BEA also produces revisions to quarterly GDP numbers – three estimates 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 four 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 30.
Once every five years, BEA produces a “comprehensive” revision to its GDP statistics, incorporating changes to how the U.S. economy is measured as well as more complete source data all the way back to 1929. Last year was one of those years. New data, new methodologies, changes in definitions and classifications, and changes in presentations were all incorporated into 2013’s comprehensive GDP revision.
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. In most quarters, these early estimates capture the direction and trends of various components of the economy, thereby providing an “early read” that is timely enough to be relevant to business and government decision makers.
The advance, quarterly estimate of GDP offers the first comprehensive picture of how the economy is performing in a given quarter and provides a 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, we don’t yet have complete source data, with the largest gaps in data for the third month of the quarter. In particular, the advance estimate lacks complete source data on inventories, trade, and consumer spending on services. Therefore, we 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 we made for a particular estimate. We also publish 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, we incorporate that information 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.
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.
More information on the 2014 Annual Revision can be found on BEA’s website.