Who Are You Going to Believe – the Commerce Dept. or ISM, Autodata & the BLS?

This past July 29, the Commerce Department surprised the economic cognoscenti by reporting that its advance estimate of second quarter real GDP annualized growth was a paltry 1.2%. The consensus estimate of Street economists was north of 2%. Oh my, with growth this anemic, the Fed certainly would not entertain raising its policy interest rates at its upcoming September 20-21 meeting, would it? Yes, it might. And here’s why.
Firstly, the advance estimate of GDP is called that because it is made in advance of the Commerce Department having all of the data that goes into the GDP calculation. For example, Commerce does not have the complete inventory, trade and construction data. So Commerce makes educated guesses as to what the missing data might turn out to be. Moreover, some of the ‘hard’ data Commerce has is actually ‘soft’ and will be revised in the coming months. As previously incomplete data are available and revisions to previously available data are made, Commerce releases a revised estimate of GDP a month after the release of its advance estimate. And then a ‘final’ estimate of GDP is released by Commerce a month following the release of the revised estimate. But the final estimate is not really final inasmuch as Commerce keeps revising a given quarter’s GDP years after the release of the not-so-final estimate. To illustrate this revision process, I pulled out of the air (thin air? drink) estimates of the annualized change in real GDP for the first quarter of 2014. The advance estimate was 0.1%. Two months later, the ‘final’ estimate was minus 2.9%. As of July 29, 2016, the estimate of the annualized change in Q1:2014 real GDP was minus 1.2%. So you can see that ‘there is many slip twixt the cup and the lip’ when it comes to advance estimates of GDP and later estimates.

This post was published at FinancialSense on 08/10/2016.