1 Report on the Income- and Product-Side Estimates of Output Growth Comments Steve Landefeld Brookings Panel on Economic Activity March 19, 2010

2 Report on the Income- and Product-Side Estimates of Output Growth ▪ Excellent and imaginative paper. BEA appreciates work such as this on measurement issues relating to its accounts.  External research, complemented by research at BEA, has been the source of a wide range of statistical improvements ranging from chain to hedonic indexes.

bea.gov 3 GDP and GDI Source Data  Both income and expenditures have measurement strengths and weaknesses  BEA devotes substantial resources to updating and maintaining both measures  Nevertheless, we think there are good reasons for us to feature a single measure GDP measure and for preferring the expenditure-side measure.  In general, we feature the expenditure estimates because of the timeliness of the quarterly source data and the consistency of that data with BEA concepts and definitions and with the annual and benchmark data

bea.gov 4 GDP and GDI Source Data: Timeliness  Quarterly source data for GDP is more timely than GDI  Improvements in coverage being incorporated in GDP (services)  Improvements in coverage being incorporated in GDI (wages)  Picture is more mixed for annual and benchmark data  QCEW quarterly employment and unemployment tax data for GDI available with one quarter lag  Census annual business statistics data available with 1-2 year lag  IRS annual data are available with a 2-3 year lag

bea.gov 5 GDP vs. GDI – Source Data for the Third Estimate of the Quarter  GDP 23% based on judgmental trend 77% based on early source data ||||||||||||||||||||||||||||||||||||||||||||||||||| 63% based on judgmental trend 37% based on early source data GDI

bea.gov 6 GDI Source Data

bea.gov 7 GDP and GDI Source Data: Consistency  The source data for GDP is mainly data Census collects using consistent definitions and surveys that reflect BEA’s needs and that can be consistently benchmarked to the once-every-five years Economic Census.  The source data for GDI is mix of mainly administrative data that are collected for non-statistical purposes using multiple definitions across the sources and over time.  There may be significant timing differences between the source data for expenditures and income.

bea.gov 8 Different Measures of Wages and Salaries

bea.gov 9 Different Measures of Profits

bea.gov 10 GDP and GDI Source Data: “Accuracy”  The Census-based GDP estimates are within 1 percent of the comprehensive revisions based on the once-every-five year Economic Census.  The GDI estimates are also within 1 percent of the comprehensive revisions based on the once-every-five year Economic Census.  Despite being estimated using very different source data and methods the closeness of these two 5-year extrapolations suggest that for trend growth, the two estimates appear to tell a consistent story.

bea.gov 11 GDP vs. GDI Tests  Cyclical indicators used may not be a good measure of output turning points:  NBER Cycles: Use and reliance on GDI data  Employment and real personal income less transfers as a monthly measure of output  S&P 500: Good financial indicator, but checkered history as cyclical indicator  May move with GDI, if capital gains and losses are “leaking” into GDI  This may help explain relation of the Statistical Discrepancy to the business cycle  Employment and Unemployment:  Employment determinant of wages and salaries in GDI

bea.gov 12 GDP vs. GDI Tests  Historically revisions to GDI may have helped reduce revisions to GDP, but gain would have been small  Use of GDI could have reduced early GDP estimate MAE by 0.07 percentage points, from 1.25 to 1.18,  Revision pattern over this period reflected many changes in source data and methods.  With major new source data and methods being introduced in GDP (all services) and GDI (all employee wages), it is difficult to predict result of using averaging going forward.

bea.gov 13 GDP vs. GDI Tests  Okun’s law isn’t a law but an empirical relationship.  Relationship has varied over time and over the business cycle; progressive reduction in the responsiveness of unemployment to GDP  Okun’s law seems to be broken for both GDP and GDI  GDI flat to falling mid 2006 to mid 2008, but unemployment falling  GDP slower growth but rising 2006 to mid 2008 and unemployment falling  Both GDP and GDI steep fall since mid 2008 and steep rise in unemployment.  Unlikely that revision to GDP would completely erase productivity gains and the good economic explanations for the changes occurring in labor markets.

bea.gov 14 GDP vs. GDI Tests  GDP and GDI early estimates produce the same general picture of economic activity.  GDP available 1-2 months before first GDI estimate.  The last two cycles, GDP and GDI latest estimates present the same general picture, but with significant differences in specific quarters.  Most recent period: Slowing of growth in 2007 both GDI and GDP Peak to Trough cumulative decline, GDP -3.1%; GDI - 4.2%. Significant revisions to come:  GDI: New annual IRS data for 2008 and revised data for 2007  GDP: New annual Census data for 2009 and 2008 and revised data for 2008

bea.gov 15 Early Real GDP and GDI Estimates (3rd Estimates)

bea.gov 16 Latest Real GDP and GDI Estimates

bea.gov 17 Early Real GDP and GDI Estimates (3 rd estimates)

bea.gov 18 Latest Real GDP and GDI Estimates

bea.gov 19 Early GDP and GDI Estimates (3 rd estimates)

bea.gov 20 Latest Real GDP and GDI Estimates

bea.gov 21 Averaging GDP and GDI  BEA will incorporate a better means of presenting data on GDI, without unduly confusing the general community of users.  We aren’t convinced that averaging the estimates would provide enough benefits to our broad range of users to make it worth the costs in terms of larger revisions to the early estimates, explaining the approach to users, etc.

bea.gov 22 Next Steps  Incorporation of the new Census data on services and more experience with the new BLS payroll and QCEW data should produce significant improvements in GDP and GDI.  Further research into balancing, now being conducted in the industry accounts.  Research on finance, and the role of capital gains, could prove helpful in better understanding and addressing the statistical discrepancy.  Data Synchronization could prove extremely helpful in resolving inconsistencies between BLS and Census data.