Gdp Report Is Nothing To Bank On Despite History Of Inaccuracy, People Take Numbers As Gospel
Should a caveat have been attached to Thursday’s estimate of second quarter gross domestic product? And if so, what should it have said?
That, perhaps, there is a high probability it may be far off the mark? That almost inevitably it will be revised? That it might be unwise to use it as a guide to buy or sell stocks or choose a political candidate?
Take your pick; all apply. And judging from experience, all might be ignored. No matter how many explanatory asterisks are attached, economic numbers tend to be convincing, especially if they have decimal points.
They aren’t of course. The GDP growth estimate for the first quarter of 1996 has already been revised downward and if the pattern continues, Thursday’s will be lowered later.
This, however, will hardly be a deterrent to action in a jittery stock market, where the sound of an economic fraction dropping can cause prices to soar or plunge and elicit all sorts of wisdom from market commentators.
More significantly, the GDP estimate can, as it seems to have in past, influence decisions on which candidate might make the best president of the United States and which party should hold sway in Congress.
Having observed how often the advance GDP is far off the mark, economist William Beach issues the plea that “Americans should not allow themselves to be deceived by these numbers and the political posturing that surrounds them.”
It is because of evidence such as this:
During Clinton’s reign, the Bureau of Economic Analysis has overestimated growth on more than 69 percent of occasions. In the Reagan administration, it underestimated 63 percent of the time.
Politics? No, says Beach, a fellow of the conservative Heritage Foundation. The civil servants who work tirelessly producing these figures are, in his words, “allergic to politics.” They just don’t mess with them.
The inaccuracies, Beach believes, result from the methodology, which he feels is dated, failing to provide adequately for the effect of tax increases and decreases. Increases tend toward overestimates, decreases to underestimates.
Supply siders believe the public reacts to tax incentives and disincentives by becoming either more or less economically active. Clinton raised taxes; Reagan cut them. Therefore the over and underestimates.
While the figures obviously can have serious political ramifications, the impact on business and the securities markets can run into untold tens of millions of dollars. Whatever the figure, it is monstrous.
Overestimates, says Beach, can result in corporations making major capital improvement and hiring plans, only to find markets don’t follow. As a result, inventories build, production slows and workers lose their jobs.
Recalling his days as a corporate economist, he tells of turning on the car radio for the advance numbers, then preparing his explanation or defense before reaching the office - just as other corporate economists did Thursday.
He despairs of training people not to react to the numbers. Instead, he says, the advance GDP shouldn’t even be released that the government should forgo the effort, wait two months and release more accurate figures.