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Why Does Government Revise Economic Data? Go Figure

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The Associated Press

Published: August 1, 2008

WASHINGTON - For many Americans, rising unemployment, higher gas and food prices, and the housing slump have felt like an economic downturn. Now the government's data are catching up.

The Commerce Department on Thursday revised its figures from 2005 to 2007 and said the economy contracted by 0.2 percent in last year's fourth quarter, down from its previous estimate of 0.6 percent growth.

What follows are questions and answers about the government's annual revisions to its economic data:

Why does the Commerce Department change its estimates?

The department revises its estimates as it gathers more data. For example, the new estimates incorporate 2005 and 2006 corporate tax data that only recently have become available from the Internal Revenue Service. The Census Bureau, Agriculture Department and other agencies also provide more information.

So does that mean the early estimates are just guesses?

No, the estimates are made from the available data. Most economists expect them to change, however, for the reason stated above.

As a rule of thumb, future changes might be about half a percentage point in either direction, said David Wyss, chief economist at Standard & Poor's.

"You trust the data, but you know it's not perfect," Wyss said.

Wall Street and academic economists can look at much of the same data the government does, so the downward revisions released Thursday weren't unexpected.

Over time, the revisions aren't as dramatic as the fourth quarter's 0.8 percentage point swing. The department cut its growth estimate to 2 percent from 2.2 percent for all of 2007. It also boosted its estimates for the second and third quarters but cut first and fourth quarter.

Can anything be done to improve the numbers?

Economists agree the government's data-gathering needs an upgrade. More should be automated, says Diane Swonk, chief economist at Mesirow Financial and former president of the National Association of Business Economists. Companies could submit payroll data electronically rather than fill out surveys, she said.

Wyss said that because of historical patterns, half of the government's spending on economic data is dedicated to agriculture, a quarter to manufacturing and only a quarter to the service sector, even though services make up 80 percent of the U.S. economy. The leading agencies spend about $1 billion a year on economic statistics, according to a White House report.

"We still have a system that's very much geared to the older, industrial sectors of the economy," said Steve Landefeld, director of the Commerce Department's Bureau of Economic Analysis.

Why do better data matter?

Because "without it, you can't make good policy decisions," Swonk said. Policymakers would have pursued different economic policies in 1990-91, she said, when the economy was in recession, but no one knew a recession was taking place until the data demonstrated it a year later.

Conversely, the $168 billion stimulus package enacted this year was particularly well-timed, Swonk said, because the White House and Congress didn't wait for the data to show a major downturn.

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