Don’t believe the GDP report!

October 26, 2012

The U.S. economy grew at a 2 percent annual rate in the third quarter of 2012, according to figures from the Bureau of Economic Analysis. That's certainly better than the data from the second quarter, when the economy expanded at a mere 1.3 percent rate.

Politically, that's good news for the president's reelection campaign--at least according to most election forecasting models. Given President Obama's pre-summer approval rating of 46.4 percent (which the model uses to allow predictions months ahead of time), and the average growth rate of 1.766 percent for 2012 to date, the Wonkblog election model puts the odds of Obama winning at about 81.3 percent.

But it's worth remembering just how subject to error these early GDP estimates are. For example, the second quarter GDP numbers were revised down from an initial estimate of 1.7 percent to 1.3 percent. According to the BEA, the average revision in either direction is 0.5 points between the first and second estimate, 0.6 between the first and third, and 1.3 between the first and last. That's a huge amount of error. Here's how revisions have looked from 2008 to the first quarter of 2012:

The initial data was generally much too optimistic throughout the recession and recovery.

Meanwhile, nominal — that is, not adjusted for inflation — GDP data were also released Friday, showing that the United States has strayed still further from the 4.5 percent to 5 percent target that some economists, such as Michael Woodford, Scott Sumner and Christina Romer, want to see. NGDP did grow by exactly 5 percent last quarter, but we've been under that target for so long that we need more growth for the economy to catch up at this point. Here's exactly how far behind we are:

 

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