• <div class="header-image" style="background-image: url(/live/image/gid/4/2897_V6N9_Header.rev.1540219621.jpg);">​</div><div class="header-background-color"/>

GDP Uncertainty: The Controversy in Calculating US Economic Growth

July 30, 2015

Concerns over Stalling First-Quarter Gross Domestic Product (GDP)

A controversy has erupted over the accuracy of first-quarter economic growth measurements. While most Americans pay scant attention to economic statistics, instead focusing on jobs and inflation, economists carefully monitor quarterly and annual GDP figures to gauge the overall health of the economy.

By Andrew Golden, Law ’17

The controversy stems from an unusual phenomenon: compared to other quarters of the year, first-quarter economic growth has woefully underperformed. Since 1995, real GDP growth averaged only 1.3% in the first-quarter but 2.9% in all other quarters.[1] This trend has become even more pronounced since the recession ended. Since the fourth quarter of 2009, real first-quarter growth has averaged only 0.4%, compared to 2.9% in all other quarters.[2] In fact, the economy contracted in the first quarters of 2011, 2014, and 2015.[3]US GDP Growth 2011-2015

[4]

It is unusual that almost every year, during the same three months, economic growth is consistently lower than the rest of the year. What could be the cause of this pattern?

Some economists speculate that poor first-quarter economic growth is due to transient factors, such as harsh winters that deter consumer spending. Many economists have instead argued that first-quarter economic growth is not actually as low as officially reported; instead, the Bureau of Economic Analysis (BEA), the agency that calculates U.S. GDP, is failing to correct for seasonal variations in economic data, leading to an artificially low GDP number every first quarter.

This phenomenon is called “residual seasonality” - the failure to adjust for seasonal variations in spending, consumer prices and production costs, all of which make up components of the GDP calculation. When reporting GDP, the BEA is seeking to provide a snapshot of underlying cyclical factors impacting the economy; for example, defense spending is a large contributor to economic growth, but if it is consistently higher in the first and fourth quarters, BEA should adjust the data to lessen the impact of defense spending in months when spending is at above-average levels. The BEA wants an accurate picture of where there is breakout growth and seeks to deemphasize well-known patterns. Residual seasonality occurs when economists fail to take into account that baseline values for certain economic phenomenon (for example, every November consumer spending is much higher due to Black Friday) are not adjusted enough, or smoothed out, relative to prior quarters so that a large variation exists in reported GDP.

The Controversy over Reported Real GDP Figures

Federal Reserve economists are divided over the issue. Economists in Washington, D.C. argue that there is no firm evidence that weak first-quarter GDP figures are due to residual seasonality factors. Instead, the weakness is due to outlier quarters where GDP contracted by large amounts, pulling down the overall first-quarter average.[5]

San Francisco Federal Reserve (FRBSF) economists make the strongest case that residual seasonality causes consistently weak first-quarter GDP figures.  They argue that the problem arises due to aggregation of the many factors that make up a GDP calculation. While these factors are already adjusted on a seasonal basis, aggregating them together gives rise to new seasonal variations. Thus, GDP must be adjusted a second time to account for any lingering effects of seasonality in the final calculation.

First, small seasonal patterns that were not significant in a variety of individual components may accumulate, rather than cancel out, when added together in the final GDP calculation.[6] This summation results in statistically significant seasonal patterns in the final data. Next, some of the source data obtained from other agencies is seasonally-adjusted on a monthly, rather than quarterly basis.[7] This apples-to-oranges comparison results in the reappearance of seasonal variability when the final GDP figure is calculated. Finally, the conversion from nominal to inflation-adjusted spending and production values can result in residual seasonality when these individually-adjusted economic variables are aggregated into final real GDP value.[8]  Arguably, this data should be adjusted a second time, after it is aggregated, to lessen any residual seasonal effects.

Based on their theory, FRBSF economists decided to apply their seasonal adjustment method to aggregated real GDP data from 1960 through Q1 2015.[9] The result was startlingly: first-quarter growth readings increased by at least one percentage point from the 1990s onward, while GDP growth readings for the rest of the year were lower.

However, New York Federal Reserve Bank (FBRNY) economists countered that any seasonality in the GDP figures is actually not residual, but due to heavy bouts of inclement weather that cause large, statistically significant drops in GDP.  Millions of Americans can attest that the winters of 2014 and 2015, when first quarter GDP contracted, were among the coldest in memory. Using a regression model to separate how much the actual temperature is above or below the monthly average, the economists concluded that wide variations in temperature, indicative of severe winter weather, are useful in predicting GDP growth.[10] Even after adjusting for seasonal factors, if the weather for the quarter is much colder than the average quarter, the impact on economic growth due to the adverse weather will still result in lower GDP figures.[11] This makes sense: since consumer spending amounts to 70% of GDP, if more people stay home during the winter months, economic growth suffers.

FRBNY’s analysis seems reasonable – sometimes the weather is so bad that it has real, lasting effects on the economy that will not disappear even after adjusting for seasonal variations. During the first-quarter, the three months with the worst weather of the year, GDP will be lower than during the rest of the year.

BEA to Revise GDP Calculation

Despite the FRBNY’s conclusion that the effects of severe weather will almost always impact final real GDP figures, the BEA has decided to review multiple components of the GDP calculation and make additional adjustments to limit the impact of seasonal factors.[12]

BEA expects to make adjustments to several components, including defense services spending, which tends to be higher in the first and fourth quarters and lower in the second and third quarters; inventory investment data that has not been seasonally adjusted in past calculations; and data from the Census Bureau’s quarterly services survey.[13] After adjusting these components for seasonality, it will re-release figures for the past several years.

With the release of BEA’s recalculated real GDP figures later this year, economists should be able to determine whether residual seasonality or extreme events like very harsh winters cause consistently lower real GDP values in the first quarter.

 

  [1]Jeffrey Sparshott, Will First-Quarter GDP Get Better After It Gets Worse? Wall St. J. (May 29, 2015); http://blogs.wsj.com/economics/2015/05/29/will-first-quarter-gdp-get-better-after-it-gets-worse/

  [2] Jeffrey Sparshott, Will First-Quarter GDP Get Better After It Gets Worse?, Wall St. J. (May 29, 2015); http://blogs.wsj.com/economics/2015/05/29/will-first-quarter-gdp-get-better-after-it-gets-worse/

  [3] Nelson Schwartz, U.S. Economy Contracted 0.7% in First Quarter, N.Y. Times, (May 29, 2015) http://www.nytimes.com/2015/05/30/business/economy/us-economy-gdp-q1-revision.html?_r=0

  [4] U.S. Bureau of Economic Analysis, “Table 1.2.1. Percent Change From Preceding Period in Real Gross Domestic Product by Major Type of Product,” http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&904=2011&903=15&906=q&905=2015&910=x&911=0 (accessed July 12, 2015).

  [5]Charles Gilbert, Norman Morin, Andrew Paciorek & Claudia Sahm, Residual Seasonality in GDP, Board of Governors of the Federal Reserve System: FEDS Notes (May 14, 2015); http://www.federalreserve.gov/econresdata/notes/feds-notes/2015/residual-seasonality-in-gdp-20150514.html

  [6] Glenn Rudebusch, Daniel Wilson, and Tim Mahedy, The Puzzle of Weak First-Quarter Growth Federal Reserve Bank of San Francisco: FRBSF Economic Letter (May 18, 2015); http://www.frbsf.org/economic-research/publications/economic-letter/2015/may/weak-first-quarter-gdp-residual-seasonality-adjustment/

  [7] Glenn Rudebusch, Daniel Wilson, and Tim Mahedy, The Puzzle of Weak First-Quarter Growth Federal Reserve Bank of San Francisco: FRBSF Economic Letter (May 18, 2015); http://www.frbsf.org/economic-research/publications/economic-letter/2015/may/weak-first-quarter-gdp-residual-seasonality-adjustment/

  [8] Glenn Rudebusch, Daniel Wilson, and Tim Mahedy, The Puzzle of Weak First-Quarter Growth Federal Reserve Bank of San Francisco: FRBSF Economic Letter (May 18, 2015) http://www.frbsf.org/economic-research/publications/economic-letter/2015/may/weak-first-quarter-gdp-residual-seasonality-adjustment/

  [9] Glenn Rudebusch, Daniel Wilson, and Tim Mahedy, The Puzzle of Weak First-Quarter Growth Federal Reserve Bank of San Francisco: FRBSF Economic Letter (May 18, 2015) http://www.frbsf.org/economic-research/publications/economic-letter/2015/may/weak-first-quarter-gdp-residual-seasonality-adjustment/

   [10] Jan Groen and Patrick Russo, The Myth of First-Quarter Residual Seasonality, Federal Reserve Bank of New York: Liberty Street Economics (June 8, 2015); http://libertystreeteconomics.newyorkfed.org/2015/06/

  [11] Jan Groen and Patrick Russo, The Myth of First-Quarter Residual Seasonality, Federal Reserve Bank of New York: Liberty Street Economics (June 8, 2015); http://libertystreeteconomics.newyorkfed.org/2015/06/

  [12] Bureau of Economic Analysis, BEA Works to Mitigate Potential Sources of Residual Seasonality in GDP Bureau of Economic Analysis Blog (May 22, 2015); http://blog.bea.gov/2015/05/22/residual-seasonality-gdp/

  [13] Bureau of Economic Analysis, BEA Works to Mitigate Potential Sources of Residual Seasonality in GDP Bureau of Economic Analysis Blog (May 22, 2015); http://blog.bea.gov/2015/05/22/residual-seasonality-gdp/

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

PENN WHARTON PPI
RESOURCE SPOTLIGHT:

  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>