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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


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/

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