Be Careful Talking to Your Clients about GDP

If you want to give clients factual data that serves as a baseline for financial planning, be careful with quarterly reports of Gross Domestic Product (GDP) issued by the U.S. Bureau of Economic Analysis (BEA).

Most advisors know each BEA quarterly GDP estimate is released three times and the gap between the first estimate and the third (two months later) can be wide. For example, BEA originally reported third quarter 2013 GDP growth at 2.8%, but then revised it to 3.6% in the second estimate and 4.1% in the third. (The gap between first and third estimates was +1.3%.)

What advisors may not know is that the third estimate is far from final and can be revised again, years or decades later, by an even greater amount. For example, in mid-2013, BEA retroactively decided that real GDP growth for first quarter of 2012 was not 2.0% (as then reported) but 3.7%, a gap of +1.7%!

What’s going on? Every five years, BEA conducts a “Comprehensive GPD Revision” and 2013’s was a doozy. BEA retroactively adjusted all GDP since 1929, magically making the U.S. economy grow by an average annual real rate of 3.3% over the last 83 years, instead of the 3.2% we thought. The reasons BEA gave for the 2014 revisions range from the dubious (adding R&D spending on Hollywood movies) to the absurd (including accrued unfunded pension liabilities, public and private). You can try to decipher the rationale.

The 2013 Comprehensive Revision met a few U.S. Government policy objectives. For the period from 2002 to 2012, average annual real GDP growth increased from 1.6% to 1.8%. The revision reduced the Price Index for PCE by -0.2% for every year from 2007-2010, making inflation appear tamer, and it increased the reported rate of U.S. personal savings by 1.5% for both 2011 and 2012, making Americans look more frugal. By adding about $500 billion to the apparent size of the U.S. economy, BEA reduced the U.S. public debt-to-GDP ratio from 106% to 102%. Details are here.

As for the idea that you may not want to consider GDP a stable indicator, that comes from the White House: “The magnitude of these changes highlights that real-time economic data can be highly volatile and subject to substantial revision. Therefore, it is important not to read too much into any one report…” Read the White House post here.