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The Art of Forecasting: Economic Outlook for 2004. FDIC Division of Insurance and Research. Data Issues & Revisions Norm Williams December 12, 2003. U.S. Economic Data Revisions, What Are the Issues?.
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The Art of Forecasting: Economic Outlook for 2004 FDIC Division of Insurance and Research Data Issues & Revisions Norm Williams December 12, 2003
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 Accuracy Cost versus Benefit • Uncertainty in overall assessment of economy’s performance may lead businesses and policy makers to “pull their punches”
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 • 2001 Example:Not so much a case of Good Economy Goes Bad,but rather “Bad” Data Go Good
For much of 2001, many thought we would skirt a recession. Some press quotes during June & July:(names have been withheld to protect the innocent) “…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” Source: Bloomberg
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) 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. …but, in late November, we were officially told the recession began in March. Source: Bloomberg
Forecasting is made more difficult when the current status of the economy is unclear. BEA 2002 revision BEA 2003 comp. revision BEA pre-2002 revision Forecast and Actual Real GDP Growth, Change from prior quarter at annual rate, percentage points 3 Blue Chip mid-quarter forecast 2 1 0 -1 -2 -3 1Q2001 2Q2001 3Q2001 4Q2001 Source: BEA, Blue Chip
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.)
So How Can We Address These Issues? • 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?
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.