How is gdp calculated
WASHINGTON (MarketWatch) — Trying to figure out how fast the huge and sprawling U.S. economy is growing has always been tricky. But it’s become even trickier in the last several years.
That’s why government wonks this week are expected to unveil a temporary salve to admitted flaws in how gross domestic product is tallied. More fixes are likely to follow later on.
The result: The supposed 0.2% contraction in the U.S. economy in the first quarter will likely be wiped away, many economists predict. They expect GDP to show a small increase instead.
The new-look GDP report, however, won’t change the longer-term picture of the economy.
The crux of the problem is this: GDP tends to show the economy underperforming in the first quarter and overperforming in the middle of the year. Perhaps the biggest headache is how the government accounts for military spending.
Evidence of flaws in the GDP report have been mounting since 2011. Sometimes the exaggerations in GDP are dramatic, making it difficult to figure out what’s really going on in the economy.
Consider: The U.S. economy has officially shrunk three times in the first quarter in the past five years. But a quarterly contraction in the middle of a recovery is about as common as a chilly day in Hades. The last time it happened was during the short-lived 1958-1960 expansion more than half a century ago.
Those flaws can lead to plenty of mischief and misdirection in Washington, too.
The sharp fluctuations give ample opportunity to politicians, for example, to praise or discredit economic policy of their opponents. Republicans blame the White House when a number is poor. The Obama administration is quick to take credit when quarterly GDP is strong.
These gyrations also complicate the job of the Federal Reserve in setting a key U.S. interest rate that affects all sorts of business and consumer loans. The Fed’s hands are tied when it looks like the economy is shrinking, and it might be too quick to act if growth looks stronger than it really is.
What the fixes to GDP are supposed to do is smooth out the path of growth. The first-quarter numbers won’t look as bad and ensuing GDP reports won’t look as good.
What the fixes won’t do is make the economy suddenly seem
sprightlier than it is. The U.S. has been growing an average of 2.2% a year since exiting the last recession — slow by historical standards — and that’s not expected to change anytime soon.
It’s still a “plow horse” economy, noted Brian Wesbury, the chief economist of First Trust Advisors.
The biggest area of distortion in the current GDP report probably involves Pentagon spending. Over the past several years, federal expenditures on defense have soared in the third quarter, when the government’s fiscal year ends, and fallen in the first and fourth quarters.
“The estimates of defense services spending have developed a ridiculously big seasonal distortion in recent years,” said Paul Ashworth of Capital Economics.
Government bean counters are expected to adopt seasonal adjustments for defense spending that show a more spread-out pattern of Pentagon outlays. Others areas to be examined closely include spending on services such as health care and business inventories.
The first quarter seems to be the hardest one to figure. The economy is often held back early in the new year by poor weather and a natural slowdown in spending following the end of the Christmas holiday season, among other things. But the series of contractions during the six-year-old recovery strongly suggest the problems also have statistical roots.
Economists and investors will start to find out on Thursday just how deep those problems are when the preliminary results for second-quarter GDP are released. The government will also reveal how it plans to make GDP more accurate.
As a result, don’t pay much heed to Wall Street forecasts predicting a 2.8% growth rate in the second quarter. Any revisions to the first-quarter numbers will likely alter the picture for the second quarter as well.
If the new approach to GDP works, future reports are unlikely to seesaw as much. Wall Street will get a better sense of how fast the economy is growing and investors will be able to make better decisions. The Fed can also act with more confidence.
And Washington? Don’t expect more accurate GDP figures to cut down on the political bickering. The economy still isn’t growing all that fast. The 2016 election will hinge on which party can do a better job persuading the public that it has the better approach to speeding up U.S. growth.
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