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July 20, 2016

Updates! Scroll down....

Nearly a month ago, we presented our "most likely" prediction for how the U.S. Bureau of Economic Analysis will revise the U.S.' Real Gross Domestic Product on Friday, 29 July 2016.

Let's recap what we forecast, picking things up from after we described how we went from estimating the "maximum potential" size of the revision to the "maximum likely" size of it, before we drilled down to what we think will be the "most likely" amount by which real GDP will be revised through the fourth quarter of 2015:

Previously Reported and Revised Real GDP, 2005-Q1 Through 2015-Q4, per BEA Regional Data released on 2016-06-14, Revised to Account for 'Overseas' GDP, with Date Correction - was 14 June 2015, now corrected to 14 June 2016 - previous chart here: https://2.bp.blogspot.com/-EzKqOVcLGC4/V2XJce71MhI/AAAAAAAANkk/uxCWYmwSK98c6baRUFRi1-NmNArdwz1qgCLcB/s1600/Political-Calculations-2016-GDP-Revision-Projection-spanning-2005Q1-to-2015Q4.png

But the "maximum likely" revision of -1.4% of previously reported GDP through 2015-Q4 is not the "most likely" size of the upcoming revision to the nation's GDP will be, because the BEA's plans for the revision of the national level GDP data will only cover the period from 2013-Q1 through 2016-Q1.

That means that it will miss the discrepancy that opens up in 2012-Q3 and 2012-Q4 between the just-revised state level GDP and previously indicated overseas federal GDP and its previously recorded national level GDP. That discrepancy is just over $55.1 billion in terms of constant 2009 U.S. dollars in 2012-Q4, which itself is over 24% of the full $225.7 billion discrepancy that our previous calculations indicates between the pre-revised national level real GDP and the post-revised state level GDP data through 2015-Q3.

Because the BEA won't be including that $55.1 billion portion of the discrepancy from 2012, the "most likely" size of the revision that it will report at the end of July 2016 is therefore -1.1%, which is 24% less than the "maximum likely" revision of -1.4% we previously calculated.

After the BEA's annual revision of GDP for the 50 states and the District of Columbia on 14 June 2016, there is only one factor left that can affect the amount by which the BEA will actually revise the nation's total real GDP next week - the contribution of overseas federal military and civilian government activities, or as we've described it, the "hidden GDP of war".

There are three scenarios in how that one factor can play out:

  1. If that contribution is greater than what the BEA has previously indicated, the amount by which real GDP through 2015-Q4 will be adjusted will be smaller. So instead of being reduced by 1.1% as we've projected to be "most likely", it would instead be reduced by a smaller percentage, or in the very unlikely case that contribution is much, much greater, real GDP through 2015-Q4 could be adjusted upward. For this scenario to occur, it would mean that the U.S. government was much more engaged in fighting wars overseas in a way that adds to the nation's GDP than it has previously indicated. This is the "under" scenario.
  2. If that contribution is less than that the BEA has previously indicated, the amount by which real GDP through 2015-Q4 will be adjusted downward will be larger, going in the direction of what we calculated would be the maximum likely revision. For this scenario to occur, it would mean that the U.S. government was engaged in less "productive" military and civilian government activities overseas than it has previously indicated. This is the "over" scenario.
  3. If the contribution is the same as what the BEA has previously indicated, then we'll see the "most likely" scenario we calculated be the actual result. Real GDP through 2015-Q4 would be decreased by about 1.1% from the level that was recorded earlier this year on 29 March 2016. This might be considered the "null" scenario.

To make that question more interesting, we asked our most dedicated readers [1] to click through and answer a SurveyMonkey poll, which we've now closed. The results of that poll are presented in the following chart.

SurveyMonkey Poll Results

As you can see, our poll produced a 40-40-20 split. 40% of the poll participants indicated they thought Scenario #1 was more likely, 40% predicted Scenario #2 would be a reality, and 20% believed in the Scenario #3 "no change from our forecast outcome" outcome.

While those results seem nearly split down the middle, what they really indicate is that the majority of the poll participants believe that the actual adjustment to real GDP through 2015-Q4 will be different from our "most likely" forecast for the size of the July 2016 national revision. What is equally split down the middle is the direction in which it will be adjusted, with no clear collective prediction emerging from our poll.

Where is Philip Tetlock when you need him?


[1] We had problems with generating working code to embed the survey directly in our post, so we were stuck with providing a link for readers to click through to participate in the survey. That's the sort of hassle that only the most dedicated readers would endure, so we greatly appreciate the extra effort on the part of all the participants who registered their own prediction for how this one aspect that will affect the actual size of the upcoming GDP revision. Thank you!

Update 27 July 2016: This is so cool! We had an extended contact today with an analyst who works for the BEA, who wanted to know more about how we came up with our estimate of how real GDP would change using the BEA's recently revised regional account data.

That was fantastic timing, because we just happened to have our spreadsheet open because we were updating it with state level GDP data from 2016-Q1 that was just released today.

In going over that material, we discovered a problem that threw off our calculations, with the effect that the results we had obtained weren't matching what they were getting from 2014-Q3 onward in replicating our analysis. We were able to trace the problem back to the GDP deflator that we used to convert nominal GDP data to inflation-adjusted "real" data, where we were multiplying the nominal data by the GDP deflator data for the national level data (the data whose revision is set to be published on Friday, 29 July 2016) instead of the GDP deflator data that applies for the aggregate 50 states plus Washington DC, which just happened to be in the spreadsheet column next to it.

After we made the appropriate correction, all our results from 2014-Q3 onward snapped into place and all results matched, from the period from 2005-Q1 through 2014-Q2, where there was never any problem, and now from 2014-Q3 through 2015-Q4! The following chart shows the latest and greatest for what we expect from Friday's GDP revision based only on the state level GDP revision from June!

Previously Reported and Revised Real GDP 2005-Q1 Through 2015-Q4 (Updated 27 July 2016)

As for the outcome of the analysis, the error we made with using the incorrect GDP deflator overstated the amount by which real GDP is likely to be revised by 0.5% of GDP, so instead of the maximum likely change of -1.4% that we had previously calculated, the maximum amount by which national GDP might change as a result of the revisions the BEA has made to its GDP data for the 50 states plus Washington DC is -0.9%, with the maximum discrepancy now taking place in 2013-Q3. This data is indicated in the chart above by the dark-green line.

But since the BEA's national revision will cover the period from 2013-Q1 to the present, the revision of the national level GDP will not include the now-confirmed $55 billion discrepancy that opens up between the national GDP data and the national aggregate state level GDP in 2012. We are therefore now estimating that the most likely revision that will be made to the national GDP data on Friday, 29 July 2016 will be an adjustment of -0.6% in 2013-Q3. This data is indicated in the chart above by the bright red line (and the blue arrow at 2013-Q3).

We'd like to thank everyone who provided their useful assistance in getting to this point - in terms of collaborative effort, this has been one of the biggest projects we've had the pleasure of working on since launching Political Calculations. It's always exciting when we get to break brand new ground and do analysis that was never possible before, and we appreciate your shared enthusiasm!

On a final note, if you happened to have come across this post by way of Econbrowser, you might want to pass along information back to the author who pointed you in this direction that their observations have been described as "not relevant". We're pretty sure that particular author hears that a lot ....

There's more that we'd like to be able to discuss on the topic of the upcoming national-level GDP revision, but that will have to wait until after that data is released. Until then, what you see above represents the most that anyone can reasonably glean about what the revision will look like based only on data that is already available to the public.

Update 29 July 2016: The verdict is in! The chart below shows the revisions in national level real GDP from 2013-Q1 through 2015-Q4....

Previously Reported and Revised Real GDP, 2005-Q1 through 2015-Q4 (29 July 2016)

Compared to our final pre-revision prediction from 27 July 2016, we were off by 0.1% of GDP through 2015-Q4, where we had previously projected no change.

More significantly however, national-level real GDP was increased by 0.2% of its previously reported figure in 2013-Q3, where the aggregate GDP data for the 50 states and the District of Columbia had instead indicated that a 0.6% of GDP decline for that quarter was most likely. That means that the amount of GDP that the U.S. generated in that quarter from Overseas Federal Military and Civilian Government Activities was revised to be significantly much higher than the BEA had previously indicated, in effect, adding an additional 0.8% of GDP on top of what the BEA now indicates was generated within the actual territory of the United States.

We'll dig deeper into the national-level GDP revision periodically over the next several weeks!

Finally, our congratulations to the 40% of respondents in our poll who chose the "under" scenario - well done!


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