Townhall

The Half Full Economy

by Peter Schiff

Aug 11, 2013

The marginal economic strength that was described in the most recent GDP release from Washington has caused many to double down on their belief that the Federal Reserve will begin tapering Quantitative Easing sometime later this year. While I believe that is a fantasy given our economy's extreme dependence on QE, market observers should have learned long ago that the Bureau of Economic Analysis (BEA) initial GDP estimates can't be trusted. A perusal of their subsequent GDP revisions in the last five years reveals a clear trend: They are almost twice as likely to revise initial estimates down rather than up, and the downward adjustments have been much larger on average.

As a result of this phenomenon, an overall optimism has pervaded the economic discussion that has consistently been unfulfilled by actual performance. The government is continuously over promising and under delivering. Unfortunately, no one seems to care.

Measuring the size of the economy accurately in anything close to real time is difficult, inexact, and messy. That is why the BEA has long pursued a policy of initial quarterly estimates (known as the "advanced estimate"), followed by two or three subsequent revisions as more thorough analysis comes to bear. The first estimates come out about a month after the conclusion of a particular quarter. The second and third revisions then come in monthly intervals thereafter. But in the minds of the media, the public and the politicians, the initial report carries much more weight than the revisions. It is the initial report that attracts the screaming headlines and sets the tone. The revisions are typically buried and ignored. This creates an unfortunate situation where the initial estimates are both the most important and the least reliable.

However, logic would dictate that revisions would fall equally in the up and down categories. After all, government bean counters are expected to report objectively, not to create a narrative or manage expectations. If anything, I believe that the public would be better served if they would adhere to the conservative playbook of under promising. That is exactly what they seemed to be doing before the economic crash of 2008. From 2002 to mid-summer 2008, the BEA revised initial GDP estimates a total of 25 times, 80% of which (20 revisions) were higher than their initial estimate. However, the average amplitude of the upward and downward revisions were equal at .5%...

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