If you’re looking for the most accurate view of economic growth, you won’t find it in the government’s top-line statistics. Last month the Bureau of Economic Analysis revised its estimate for the first quarter of 2018; the BEA now says gross domestic product grew 2%, annualized, down from the previous figure of 2.2%. This dramatically understates the economy’s actual performance. A better measure, factoring in statistics on incomes, shows growth steaming along at a much stronger 2.8%.
Why the difference? In short, because the data aren’t perfect. Unlike the unemployment rate, which comes from a (relatively) straightforward survey, GDP is not measured directly. Instead, the BEA sums up economy-wide expenditures from dozens of data sources, covering consumption, investment, government spending, net exports and more.
Last month’s figure was the BEA’s third estimate for the first quarter. Yet at this stage the statisticians have comprehensive data on only 38.5% of GDP. Most of the rest was inferred using direct or indirect indicators, such as by taking the number of housing starts as a proxy for dollars invested in new home construction. For 12% of GDP, the statisticians used “trend-based data,” which essentially amounts to extrapolation and guess work. To take a couple of specific examples, the BEA had a reasonably accurate measure of cars bought in the first quarter, but it had to guess how much financial services were purchased.
. . . Drawing on more data can cancel out some of this noise and produce a more accurate figure that requires smaller revisions. Specifically, the BEA separately gauges the size of the economy by adding up all the different sources of income, such as wages and profits. This figure is called gross domestic income, or GDI, and in the first quarter of 2018 it grew by an estimated 3.6%, annualized.
Ultimately, GDI should be identical to GDP, since all money spent is money earned. But in practice the published estimates differ because the data are subject to different errors and reflect different guesses. Research shows that a simple average of GDP and GDI is a nearly optimal way to combine the two sets of information. For the first quarter it averages to 2.8% growth. That is the best predictor of what the government will eventually estimate for GDP after several years of revisions.
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