The U.S. economy grew at a 4 percent annual rate in the second quarter, according to the government’s first stab at calculating the gross domestic product. That great number could very well be lowered—or possibly raised—before the final numbers are in.
Economists generally liked the report. “The trends from 2013 and this most recent data show that the economy is on sound footing and justify a solid forecast for the second half of 2014 of 3.0-3.5 percent growth,” Doug Handler, chief U.S. economist for IHS, wrote in a statement.
Measuring the growth of something as big and complex as the world’s largest economy is no easy task, especially since a lot of the necessary information doesn’t come in right away. Some sources take years to collect and analyze. On Wednesday, for instance, the Commerce Department’s Bureau of Economic Analysis, which issued the latest number, also revised past GDP figures to incorporate data revisions from the Census Bureau, Internal Revenue Service, Agriculture Department, and Bureau of Labor Statistics going back to 2011. International transactions were revised all the way back to 1999.
At least the Bureau of Economic Analysis is transparent about its changes. A page on the website shows the “vintage history” of GDP estimates. The first quarter of 2002 has accumulated 10 estimates, of which the latest came out this morning. Growth that was originally reported at 5.8 percent—and welcomed at the time by President George W. Bush—has since been revised down to 3.7 percent.
Revisions get smaller as the years go by, to be sure. Until today, the Bureau of Economic Analysis had been saying that the U.S. economy grew at a 2.2 percent annual rate from 2011 through 2013. Now it’s saying the growth rate was 2 percent even. Revisions to earlier years were too small to merit mention in its press release.
The most recent quarters tend to be revised most because early estimates are based on the most incomplete data. The estimate for the first quarter of this year has been particularly volatile. The first “advance” estimate of the annual pace of change was growth of 0.1 percent. The second estimate, a month later, was a decline of 1 percent. The third estimate, a month after that, was a decline of 2.9 percent. After those first three estimates come revisions. Today the first quarter was revised upward to a decline of 2.1 percent.
Service-sector figures are particularly tricky to collect in the early going, as I wrote last week. The Bureau of Economic Analysis initially estimated that health-care usage rose at a 9.9 percent annual rate in the first three months of 2014. It later concluded that it declined at a 1.4 percent annual rate—a huge swing by any measure.
Today’s number for the second quarter of 4 percent was good, exceeding the 3 percent median forecast of 80 economists surveyed by Bloomberg. But economists quickly noted that 1.66 percentage points of that was accounted for by the change in private inventories. That can weigh on growth in future quarters because companies have bigger inventories than they need and can decide to cut back on production. The reverse is also true: One reason for the strong growth in the second quarter is that inventory changes subtracted 1.16 percentage points from growth in the first quarter.