Academic journal article Brookings Papers on Economic Activity

The Income- and Expenditure-Side Estimates of U.S. Output Growth-An Update to 2011 Q2

Academic journal article Brookings Papers on Economic Activity

The Income- and Expenditure-Side Estimates of U.S. Output Growth-An Update to 2011 Q2

Article excerpt

ABSTRACT In light of recent large revisions to the official measures of U.S. output, this update reviews the evidence in my 2010 Brookings Paper showing that the income-side estimate of output (currently called gross domestic income, or GDI) likely captures business cycle fluctuations in true output better than its better-known expenditure-side counterpart (called gross domestic product, or GDP). Most notably, over the 2007-09 downturn, the revisions moved the expenditure-side estimates closer to the income-side estimates, which showed that the downturn was considerably worse than reported initially by the expenditure-side estimates. The tendency for the expenditure-side estimates to be revised toward the income-side estimates is clearer now, as is a tendency for the smoothed income-side estimates to be revised away from the smoothed expenditure-side estimates.

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Since publication of my 2010 Brookings Paper (Nalewaik 2010), the two official measures of U.S. output, GDP(E) and GDP(I), have passed through two annual revisions? The revisions lowered GDP(E) by a sizable amount: GDP(E) in 2009Q3 was revised down about 2 percent relative to its level in early 2006. In light of these revisions, I update the evidence in Nalewaik (2010) showing that GDP(I) likely provides a more accurate estimate of output growth than GDP(E).

Broadly speaking, three things have changed as a result of the revisions. First, some of the countercyclicality of the statistical discrepancy between GDP(E) and GDP(I), a striking finding in Nalewaik (2010), was revised away, but only with respect to the last few years. The countercyclicality from the mid-1980s to the mid-2000s remains.

Second, the tendency for the initial GDP(E) estimates to be revised toward the initial GDP(I) estimates has become clearer, strengthening the evidence that initial GDP(I) growth is a more accurate estimate of true output growth than is initial GDP(E) growth. In particular, GDP(I) picked up the onset and the severity of the 2007-09 downturn better and sooner than GDP(E), adding to the long list of cases where GDP(I) has recognized important economic phenomena before GDP(E). That list includes the productivity acceleration in the mid- to late 1990s and the sluggishness of the recovery following the 2001 recession.

Third, when the growth rates are smoothed into year-over-year changes, a tendency for the initial GDP(I) growth estimates to be revised away from the initial GDP(E) growth estimates has become clear as well. Indeed, the revisions to GDP(E) and GDP(I) growth tend to go in the same direction: if initial GDP(I) growth is above initial GDP(E) growth, both estimates tend to be revised up, and if initial GDP(I) growth is below initial GDP(E) growth, both tend to be revised down. This update discusses a potential explanation for this pattern in the revisions, related to differences in how well the estimates pick up output fluctuations from firm births and deaths.

Section I of this update discusses the changes to the estimates over the 2007-09 cyclical downturn since Nalewaik (2010). Section II discusses the implications of these changes for understanding the relative reliability of the latest available output growth rates. Section III discusses changes to the cyclicality of the statistical discrepancy. Section IV discusses the implications of these changes for understanding the relative reliability of the initial output growth rate estimates (those released about 3 months after the close of each quarter). Section V concludes with a brief discussion of progress on the recommendations of Nalewaik (2010) to improve the measurement of GDP. An online appendix interprets the variance of the estimates and the size of the revisions to the estimates, providing a response to assertions made in a recent article by Bureau of Economic Analysis (BEA) staff (Fixler, Greenaway-McGrevy, and Grimm 2011). (2)

I. The Estimates over the 2007-09 Cyclical Downturn

The top panel of table 1 shows the revisions to the Q4-over-Q4 growth rates in GDP(E) and GDP(I) in 2007 and 2008 since Nalewaik (2010). …

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