Data Issues & Revisions

Norm Williams December 12, 2003

FDIC Division of Insurance and Research

The Art of Forecasting:Economic Outlook for 2004

U.S. Economic Data Revisions, What Are the Issues?

• Businesses and policy makers rely on economic information and forecasts in making decisions to hire, invest, and provide or remove stimulus

• Trade-offs in collecting and providing data:Timeliness versus AccuracyCost versus Benefit

• Uncertainty in overall assessment of economy’s performance may lead businesses and policy makers to “pull their punches”

• 2001 Example:Not so much a case of Good Economy Goes Bad,but rather “Bad” Data Go Good

U.S. Economic Data Revisions, What Are the Issues?

• Challenge to forecasters: models specified to fit revised data may not work so well in real-time

For much of 2001, many thought we would skirt a recession.

“…and I do not think the United States economy is in a recession but I think it is in a growth slowdown.”

The economy is “probably at or near the bottom, and probably won’t tip into recession.”

“The economy is not going into a major recession”

Some press quotes during June & July:(names have been withheld to protect the innocent)

Source: Bloomberg

9/11 “will significantly harm the economy in the third quarter and the fourth quarter and increase significantly the likelihood that the economy is in recession.”

Conference board survey: 52% of those polled said that the U.S. economy would move into recession, up from 47% in September.

Then in October many thought that 9/11 had tipped us over into a recession.

Some press quotes during late October:(names have been withheld to protect the innocent)

Source: Bloomberg

…but, in late November, we were officially told the recession began in March.

Forecasting is made more difficult when the current status of the economy is unclear.

-3

-2

-1

0

1

2

3

1Q2001 2Q2001 3Q2001 4Q2001

Forecast and Actual Real GDP Growth,Change from prior quarter at annual rate, percentage points

Source: BEA, Blue Chip

Blue Chip mid-quarter forecast

BEA pre-2002 revision

BEA 2002 revisionBEA 2003 comp. revision

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

trough - 2 quarters trough +2 quarters peak - 2 quarters peak + 2 quarters

Average Revisions Around Economic Turning Points, 1969 to 1991Percentage point revisions to annualized growth rates in real GNP/GDP

Source: "Do Provisional Estimates of Output Miss Economic Turning Points?" Dynan & Elmendorf (FRB, November 2001)

Initial GDP reports have under-estimated growth near the bottom of recessions, while showing smaller misses near the peaks.

1968-2000 average

So How Can We Address These Issues?

• Knowledgeable users: some evidence that private sector forecasters treat revisions as random, even though they may be somewhat predictable

• Trends in real-time information, like yield spreads and stock prices, do provide (slight) insight into direction of ultimate GDP revisions

• Fed relies significantly on supplemental anecdotes to inform its policy decisions (Beige Book, etc.)

• BEA and BLS already taking major steps to improve quality:

(1) BEA adoption of chain weights in 1996 comprehensive revision

(2) BEA published 12th comprehensive GDP revision this week

(3) BLS major update to employment (nonfarm payroll) methodology in 2003

• NBER now using MA’s monthly GDP estimates

• Would more funding for better statistics pay off?

So How Can We Address These Issues?

By one estimate, paying for the 3 major US statistical agencies already provides a significant economic return, with plenty of room to fund data quality improvements.

0

10

20

30

40

50

cost of TFP datauncertainty

value of eliminatingpredictable trends in

TFP revisions

value of TFP datareports

Census + BLS +BEA FY2004 Budget

U.S. Total Factor Productivity Cost Benefit AnalysisBillions of dollars (based on annual services + nondurable goods consumption of $7 trillion)

Source: "Data Revisions in General Equilibrium" S. Boragan Aruoba (University of Pennsylvania, November 2003)

$43.2B

$12.1B$9.0B

$1.3B