Don’t get too worked up about today’s GDP numbers

The initial GDP estimates are out for the first quarter of 2012. And the results are… disappointing. According to the Commerce Department, the economy grew at a mere 2.2 percent pace from January to March. Analysts were expecting 2.5 percent.

(Ty Wright - BLOOMBERG) Yet some economists are already cautioning us not to read too much into these numbers. The GDP figures are, after all, just a first-pass estimate — and they’ll be revised later on. “Given the noise in the advance GDP estimate,” says Justin Wolfers, “a number 0.3% below consensus isn’t really at odds with either bullish or bearish sentiment.”

Some people might read this statements as an attempt to spin away bad news for President Obama’s re-election bid. But it’s not. (After all, the revisions could be even worse.) It’s more an acknowledgment that first-pass GDP estimates have usually been way off in recent years.

A recent study from the Federal Reserve Bank of St. Louis put this in helpful chart form:

Advance estimates of GDP growth are very frequently incorrect. Over the last eleven years, the study found, the GDP numbers have gotten revised by about 0.54 percent by the third pass. And when all of the numbers since 2007 were redone in July 2011, the corrections got even bigger. Here’s the St. Louis Fed’s explanation for why the revisions are often so drastic:

The Bureau of Economic Analysis (BEA) computes GDP by collecting data from thousands of government and private sources on factors such as business fixed investment, trade, individual consumption, and government spending. Four weeks after a quarter ends, the BEA announces its first release of GDP, known as the advance estimate. Because only 45 to 75 percent of the data are available at this time, the BEA makes its best estimate for the missing components in order to provide a timely release.

The tricky part is that there’s no consistent pattern as to whether the GDP numbers subsequently get revised up or down. So the U.S. economy might be chugging along at a faster pace than today’s numbers suggest. Or it might be doing much worse. A big downward revision from today’s 2.2 percent — something that happened in 2011 — would mean the economy is in an extremely weak spot.

Of course, just because the data’s noisy doesn’t mean we can’t still speculate about what this all means for the upcoming presidential election. “I wouldn’t wanna engage in election punditry based on the advance estimate of GDP for Q1,” adds Wolfers. “But apparently that isn’t stopping anyone.”