Furman: Economy Growing Faster Than Government Says

Furman: Economy Growing Faster Than Government Says

So how fast is the economy really growing?

Estimates for growth in gross domestic product (GDP) for the second quarter of 2018 range from 3.8% to 4.8%, but the Bureau of Economic Analysis (BEA) won’t release its first estimate until July 27. That “advance” number will then be revised by the BEA as follows:

“Current quarterly estimates of GDP are released on the following schedule: ‘Advance’ estimates, based on source data that are incomplete or subject to further updates by the source agency, are released near the end of the first month following the end of the quarter; as more detailed and more comprehensive data become available, ‘second’ and ‘third’ estimates are released near the end of the second and third months, respectively. ‘Latest’ quarterly estimates reflect the results of both annual and comprehensive updates … ”

With all of those estimates, the final number should be reasonably accurate — or so you might think. Yet Jason Furman, who served as President Obama’s chief economic advisor, believes the BEA’s “latest” estimate for Q1 understates growth by 40%, which is a pretty big miss.

The BEA says the economy grew just 2.0% in Q1, which is down from its previous estimate of 2.2%. Furman believes 2.8% is a more accurate number.

Given that Furman served as chief apologist for Obamacare, even as health insurance premiums more than doubled, we typically read what he writes with a bit of skepticism. But his conclusion is at least worth considering.

We’ve argued in the past that the BEA doesn’t necessarily provide the most accurate numbers for unemployment or economic growth, but the unemployment stats seem to us to be skewed for political reasons, as the official U-3 number is almost always used and the U-3 number doesn’t consider people who have given up looking for work to be unemployed; it also considers part-time workers to be fully employed. The “real unemployment rate,” known as the U-6 rate, was 7.8% in June 2018, which is more than double the U-3 rate of 3.0%.

Unlike the unemployment rate, which is calculated based on a survey, GDP is not measured directly and, Furman says, “the data aren’t perfect.”

“Instead,” Furman wrote in The Wall Street Journal, “the BEA sums up economy-wide expenditures from dozens of data sources, covering consumption, investment, government spending, net exports and more.”

GDO Is More Accurate

Even the third estimate is based on comprehensive data for only 38.5% of GDP, according to Furman. Remaining data is based on “direct or indirect indicators;” for example, the number of housing starts is used 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,” according to Furman. For example, the BEA does not have an accurate measure of how much financial services were purchased in the quarter, so it guesses.

Jason Furman

Furman argues that gross domestic income (GDI), which includes wages, profits and other sources of income, can be a better measure of economic growth. GDI, which grew by an estimated annualized rate of 3.6% during the first quarter, “should be identical to GDP, since all money spent is money earned.”

Published estimates of GDI and GDP differ, though, because the data are subject to different errors and reflect different guesses.

The most accurate prediction for economic growth, research cited by Furman shows, after several years of revisions is gross domestic output (GDO), which is the average of GDP and GDI.

GDO may be more accurate, but using GDP provides a benchmark for comparing today’s economic growth with growth from previous periods. We don’t expect a change in how economic growth is calculated to be made anytime soon.

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