MacroScope

Regarding second quarter GDP, beware the benchmark revisions!

July 17, 2013

If there ever was a time to discount estimates of an advance GDP report, now is the time, says Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. That’s because the first snapshot of U.S. Q2 GDP growth, due out on July 31, will occur alongside the Bureau of Economic Analysis’ (BEA) comprehensive benchmark revisions.

These revisions occur about once every five years and go back to the beginning of GDP reporting in 1929. The BEA will also incorporate research and development and royalties from film, television, literature and music into the GDP accounts. The net effect could be a 3 percent upward revision to the level of output.

However, of greater significance will be the change in growth, rather than the outright level, LaVorgna said.

This is what makes Q2 GDP estimates so difficult to forecast. Based on the recent and substantial upward revisions to nonfarm payrolls, we believe the growth rate of GDP will be revised modestly higher over the past several years. This is a separate issue from the overall level being revised higher.

Since economists use the base level of output in the previous quarter as the liftoff point for estimating subsequent quarters, forecasters’ collective projections are more tentative than usual given the high likelihood that the historical profile changes, LaVorgna said.

Since 1990 a one standard deviation change on quarterly GDP from the first to the last print is a remarkable 160 basis points. Therefore, it is prudent to downplay the Q2 GDP numbers until we have seen the full set of revisions. Moreover, in our Q2 GDP forecast, private domestic final sales are still slated to rise 2.6 percent, a decent pace considering that the economy experienced so much first-half fiscal drag.

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