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David Prowse and Mark Hamill in Star Wars: The Empire Strikes Back (1980)
Skyscraper security admonishes hooligan to return to the tourist walkway? Futuristic firefighter saves boy trapped on space tree? Even Star Wars needs context to understand. Photograph: Allstar/Cinetext/LucasFilm Photograph: Allstar/Cinetext/LucasFilm
Skyscraper security admonishes hooligan to return to the tourist walkway? Futuristic firefighter saves boy trapped on space tree? Even Star Wars needs context to understand. Photograph: Allstar/Cinetext/LucasFilm Photograph: Allstar/Cinetext/LucasFilm

Is the US recovery getting better or worse? Likely both

This article is more than 9 years old

Judging the economy on a new number is like trying to decipher the plot of a film from one frame – it’s not the whole story

Is the US economy finally improving after six years of stubborn stagnation, or is it bumping along sadly with no progress?

Yes.

Here are the numbers: the US economy grew a whopping 4% in the most recent quarter, after dipping to -2.1% in the first three months of the year.

It’s a wild swing, nearly the stuff of science fiction, and one that deserves skepticism.

While several publications touted the great new GDP growth, because 4% is miraculous, it’s important to take note that the enthusiasm was not widespread. Don’t jump to any conclusions about the economy based on today’s GDP report.

The Bureau of Economic Analysis, which actually crunched the GDP numbers, was far more subdued than the econowonks of Twitter. In the second line of its release it warned everyone that the 4% estimate is highly likely to change:

The bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency.

The BEA mentioned the warning up high: in the second paragraph of its news release.

Go back further, and the BEA suggests economic growth is very slow: only 1.8% a year on average between the fourth quarter of 2010 and the first quarter of this year.

A pictorial representation of economics: pick a number. Photograph: William Whitehurst/© William Whitehurst/CORBIS Photograph: William Whitehurst/© William Whitehurst/CORBIS

Yet very few economists will follow suit after the BEA and give this warning the emphasis it deserves. While economic statistics – and in particular GDP – come with a passel of warnings, asterisks and nuances, the headlines and stories and commentaries tend to pick a story and stick with it.

Revisions: the relentless questioning of what we know

Instead, expect revisions. Did the economy really grow at 4% in the last quarter? It’s unlikely, only because every statistic about the economy gets revised multiple times – a process that extends for months and even years after the initial estimate.

Witness, for instance, these snapshots of the BEA’s lists of revisions today. You don’t need to understand them all. Just look at how many there are. These changes don’t come from incompetence; they come from the constant influx of new information about the economy.

GDP Swings
The Bureau of Economic Analysis lists the revisions to GDP in the past few years. You don’t know need to know what all of it means, but the scale of the changes shows how malleable the numbers are. Photograph: /Bureau of Economic Analysis Photograph: Bureau of Economic Analysis
GDP swings continued
The revisions continue for more than a full page in the Bureau of Economic Analysis’s advance report, released Wednesday Photograph: /Bureau of Economic Analysis Photograph: Bureau of Economic Analysis

A good rule is that what we see at any one time about the economy is a snapshot, similar to a freeze-frame in a movie. You can figure out the plot only after looking at many, many pictures. GDP, which is measured every three months to tell us how the economy is doing, is maddeningly vague because it’s always in motion: people are always selling, buying, stocking up on inventory or sending goods overseas.

That’s why when you make big financial decisions, you shouldn’t rely on any economics that comes in a neat package. Economic statistics tell a story over time. They don’t spill their secrets all at once.

What economists do is patch the numbers and anecdotes together and interpret them. It’s inexact and frustrating, which is partly why economics is called “the dismal science”. The experts try to make a feast of analysis out of tragically thin gruel. They are aware of the pitfalls; readers aren’t always. Don’t set your clock by the economic numbers, and don’t set your mood by them either.

Nailing down GDP in a single quarter is like trying to figure out the plot of the 1998 movie Sliding Doors from a single frame. Photograph: Allstar/INTERMEDIA/Sportsphoto Ltd. Photograph: Allstar/INTERMEDIA/Sportsphoto Ltd./Allstar

Take today’s GDP numbers. How can you, as a reader, know what to believe?

The first step is to understand the pitfalls. See which houses are built on sand: where are the weaknesses underneath the numbers? In the GDP report, for instance, there was a big jump in consumption, or buying, driven by durable goods. Many people believe that jump came from car sales.

So let’s examine why car sales are growing. Are people spending more? Are cars costing less?

The answer is easy to find: it’s cheaper and easier than ever to borrow money at low rates to buy a car. As a result, more people are buying cars, and many of those people are subprime consumers with bad credit ratings.

This is a warning, a red flag. If more people are buying, that’s good. If more people are buying things they can’t really afford, that’s bad. And if GDP has trouble maintaining its lofty goals later, you’ll know why.

Another potential weakness in GDP is the growth of business inventories. We don’t know why inventories are growing. A positive interpretation is that businesses sense demand and are stocking up inventory for the fall. A negative interpretation is that businesses already stocked up way too much and can’t sell enough product from their warehouses. We have no way of knowing from the BEA’s report; we need anecdotes and reporters to fill in the rest.

In short, the economy has both good and bad elements at the moment: it’s better than it was, but not as strong as it could be. Which deserves more emphasis? To know that, you’ll have to wait, watch and expect a lot of changes along the way.

More on this story

More on this story

  • Service sector boom puts US economy on track for strong second half of 2014

  • US economy bounces back with 4% GDP growth in second quarter

  • Average Americans remain skeptical of economists' positive forecasts

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