T Bailey

December 2009 Fund Manager Commentary

Published 12:00AM 14 December 2009

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In its latest announcement during November the Bureau of Economic Analysis (www.bea.gov), the body that publishes the closely watched US economic accounts statistics, revised down its estimate of US GDP growth for Q3 2009 to 2.8%.

This figure, which represents the increase in production between the end of Q2 2009 and the end of Q3 2009 on an annualised basis, marks the start of the path to the economic recovery in the US ending four consecutive quarters of negative GDP.  However this figure is some way below the BEA’s first estimate a month earlier of 3.5%.

Although the size of the adjustment seems large, indeed the margin of error in percentage terms is 20%, in an historical context this seems reasonably accurate.  The chart below shows the percentage margin of error between the first, “Advance”, measure of GDP released by the BEA approximately 1 month after the end of each quarter and the third or “Final” measure of GDP released approximately 3 months after the end of each quarter over the last 3 years.

Whilst Advance estimates have provided a timely and reliable indicator of whether the US economy has been expanding or contracting the trade-off has been the accuracy of the reported magnitude of changes in GDP.  Somewhat remarkably the progression of GDP as measured by the Advance and Final estimates of GDP have been very similar albeit the notably smoother path of the Advance measure is perhaps an indication of the extent of the judgements and estimates made in its prompt compilation.

This highlights the dangers of relying too heavily on time series data not least for governments trying to fine tune their fiscal and monetary policies.  Indeed, if the US finds it difficult to obtain reliable and timely economic data it brings to question the chances for other countries and particularly those of the emerging nations.  On the other hand if you estimate your growth at closer to 9% per annum perhaps there is not such a pressing need!

Submitted by: Elliot Farley

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