Jason Furman on how GDP is estimated

The official top-line figure for the first quarter is 2%. A more accurate measure puts the rate at 2.8%.

See The Economy Is Growing Faster Than the Government Says. He was chair of the Council of Economic Advisors under President Obama. Excerpts:

"GDP is not measured directly. Instead, the BEA sums up economy-wide expenditures from dozens of data sources, covering consumption, investment, government spending, net exports and more.

Last month’s figure was the BEA’s third estimate for the first quarter. Yet at this stage the statisticians have comprehensive data on only 38.5% of GDP. Most of the rest was inferred using direct or indirect indicators, such as by taking the number of housing starts as a proxy for dollars invested in new home construction. For 12% of GDP, the statisticians used “trend-based data,” which essentially amounts to extrapolation and guess work."

"Producing the most accurate statistics can be costly, complicated and fraught with these kinds of measurement problems. Despite the best efforts of the BEA’s excellent civil servants, the underlying data are noisy and incomplete, meaning that revisions to GDP growth estimates can be large and often confusing. The average absolute revision from 1993 through 2016 was 1.3 percentage point."

"the BEA separately gauges the size of the economy by adding up all the different sources of income, such as wages and profits. This figure is called gross domestic income, or GDI, and in the first quarter of 2018 it grew by an estimated 3.6%, annualized.

Ultimately, GDI should be identical to GDP, since all money spent is money earned. But in practice the published estimates differ because the data are subject to different errors and reflect different guesses. Research shows that a simple average of GDP and GDI is a nearly optimal way to combine the two sets of information. For the first quarter it averages to 2.8% growth. That is the best predictor of what the government will eventually estimate for GDP after several years of revisions."

"As the economy entered a tailspin at the end of 2008, the original report for the fourth quarter had GDP growth at minus 3.8%. That was eventually revised to minus 8.2%."

Related posts:

How Long Have Economists Known About The Shortcomings Of GDP?

Okun's Law (on the relationship between GDP and the unemployment rate)