Claudia Sahm who's a former Fed economist had a pretty interesting article about economic data revisions. The link is below. I'll post some key points that stood out to me. There are charts in the link so make sure you check out the link.
– Thursday is the Bureau of Economic Analysis’ comprehensive revision for the national accounts, including GDP, inflation, consumer spending, investment, and much more. The updates will cover the first quarter of 2013 to the first quarter of 2023, and we get 3rd revision to Q2 2023.
– BEA will start publishing ‘super core’ inflation (core services excluding housing)—a recent focus of the Fed
– It takes time to gather all the data, and some important sources, like the quinquennial Economic Census, which is mandatory for the vast majority of business establishments, are too demanding to collect every year, let alone every quarter. So, while the revisions may upend stories spun off the early data releases, they are signs of the estimation methods constantly improving and more data coming in.
– GDP: History shows us that revisions can be important. In a prior research note, I showed that during the Great Recession, the Fed staff’s forecast and then-available data for GDP vastly understated the severity of the Great Recession.
– Specifically, in mid-2008, the Fed expected real GDP that year would increase by 1% (first blue bar). Instead, by the end of 2008 (second blue bar), the data showed a slight contraction. With each annual revision (moving further left to right), the estimate for real GDP growth in 2008 became weaker. Currently, the estimate is a decline of 2.5% in 2008. That’s over a 3 percentage point swing from the expectation in mid-2008.
– core PCE: The 12-month core PCE inflation in March 2009 was 1.8 percent in the initial release. But after years of revisions, in the current data, it is 0.8 percent. A one percentage point difference in core inflation is massive, and in this case, putting the economy much closer to the ‘danger zone’ of deflation than was apparent at the time.
– revisions to core services were larger and more persistent than core goods in the past. And since core services are a much larger share of overall core inflation, it drives the revisions. Plus, given the attention to core services, it is a series to watch in the revisions.
– The Great Recession, which motivated the GDP and the inflation examples above, was a severe downturn, and most revisions are less consequential. However, the pandemic was unprecedented and severe, and its recovery was unusually rapid, so don’t count out big revisions, though it may take several years to see them.
– GDP: those suggest that GDP could likely revise down. Why is that? Gross Domestic Income (GDI)—conceptually the same as GDP—has been notably weaker than GDP recently.
– Specifically, real GDI declined (-3%) in 2022:Q4 and 2023:Q1 (-2%); it was flat (-0.5%) in 2023:Q2. All this while real GDP increased steadily (2% to 2.5%). That’s a very different picture. And if economic activity were, in fact, closer to GDI, then the puzzle of growth holding up as interest rates shot up and consumer sentiment was in the doldrums would be less puzzling. And most importantly, it would suggest that the Fed has less work to do.
– In the past several decades, the initial releases of GDI have done a better job than the initial releases of GDP at predicting output after years of revision. The average of GDI and GDP referred to as Gross Domestic Output (GDO), is a good proxy for actual output
– Fed is using GDP, at least partly, to argue that economic activity is surprisingly strong. And a higher path for the federal funds rate through 2025 will likely be necessary to bring inflation back down to 2%. But with recent GDI growth considerably lower than GDP, that’s a risky bet on how well the economy is doing now.
– CPI: Unlike PCE inflation, the only revision to the CPI is seasonal factors. As a result, the range of the CPI revisions is much narrower than PCE. However, these revisions can still reshape the narrative. New seasonal factors for motor vehicles wiped out what had looked like a clear step down in core CPI inflation late last year—other series, like the unemployment rate, also only revise annually with new seasonals. To use the data policymakers had at the time is why I developed the Sahm rule with real-time data.
– GDP tracks all expenditures on final goods and services produced in the United States, whereas GDI tracks all income received by those who produced that output. Conceptually, the two should be equal because every dollar spent on a good or service (in GDP) must flow as income to a household, a firm, or the government (and, therefore, must show up in GDI). However, the two rely on different data sources and measurement issues, so discrepancies often arise.
– NBER recession dating committee relies on both GDP and GDI.
TLDR : don't over-rely on one economic data, especially on its initial release. History shows that these econ data are prone to huge revisions months, years later.
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