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Estimating GDP is like pinning the tail, somewhere, on the donkey

Source: Flickr

Source: Flickr

Wall Street hangs on every number published by any government agency as if they are accurate to the 3rd decimal place.  The fact is, most are estimates, especially the GDP number. On top of this, the seasonal adjustment process probably was key in understating economic activity, and this GDP number is most likely going to be adjusted upward over the next two months (the number today was the first of three “estimates”). 2014 first quarter GDP was estimated to have grown just 0.10%, well below the consensus.

Seasonal Adjustment (SA) was a big issue in this estimate.  If you think about seasonal patterns as forming a normal curve with the seasonal factor as the mean of the distribution, then the seasonal factors do a good job if the distribution is tight with a small standard deviation and abbreviated tails.  But, if the distribution is wide with large tales and a large standard deviation, and events (like a harsh winter) fall into a tail 2 or 3 standard deviations away from the mean, then the SA process isn’t useful and reality is either better or worse than what the SA number reports.  In this case, the SA process understates the strength of the economy.

All of the underlying data since February show strength including the labor market, retail sales, durable goods orders, and leading economic indicators.  The Federal Reserve and Yellen, today, recognized such strength and continued with their programmed taper.  In addition, today ADP estimated April’s job growth at 220,000.  If Friday’s official new job numbers are anywhere near the ADP estimate, the .1% GDP growth will be viewed as irrelevant.  This appears to be a likely scenario.

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee.

Contact Robert Barone or the professionals at UVA (Joshua Barone and Andrea Knapp) who are available to discuss client investment needs. Call them at 775-284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.

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