As Mark Thoma notes, when the original 3rd quarter growth was announced, the BEA headline figure of 3.5% GDP was big news because it represented a reasonable growth recovery stage. One direct policy implication of this was it took wind from the sails of secondary fiscal stimulus.

Two revisions later — first down to 2.8% and yesterday to 2.2% — and things don’t look nearly as rosy. I wholeheartedly agree that policymakers need better forecasting tools; there were other private sector analysts with better forecasts even without the benefit of government data.

However, I’m not sure this call to arms is realistic or feasible; forecasting is sometimes more art than science due to a naturally-occurring phenomena known as GIGO (“Garbage-In Garbage-Out”). Headline numbers are incredibly easy to manipulate based on expectations — if this were not the case then we’d never have had a financial crisis to begin with.

Policymakers Need Better and More Timely Economic Data

By Mark Thoma

When it was announced two months ago that GDP had grown by 3.5 percent in the third quarter of this year, it took the sails out of any movement toward another stimulus package. Now the number has been revised downward to 2.2 percent.

At a growth rate of 3.5 percent, the economy would be growing slightly faster than the long-run trend so that, although progress would be very, very slow, the economy would at least be catching up to the long-run trend (in the recovery from previous recessions, it was not unusual for GDP to grow at 6 or 7 percent, but even at those high growth rates the recovery takes time). At a growth rate of 2.2 percent, the economy is not even treading water let alone making up for past losses.

The economy needs more help, but they way in which the GDP numbers arrived, with the 3.5 percent initial figure heralded as the sign that better times were just around the corner, undermined the case for a new fiscal stimulus package and likely caused the Fed to back off of any further plans it might have had to do more to help the economy recover. Now we know the 3.5 percent figure was overly optimistic, but two months have passed and any momentum towards providing additional stimulus has largely faded from discussion.

This points to the fact that policymakers need better and more timely data. The fourth quarter is almost over yet we are still trying to figure out what happened in the third quarter, and we still don’t know for sure. There has been lots of criticism of how policymakers have reacted in this recession, much of it deserved, but little of that discussion has recognized the data problems. I don’t know for sure what the problems are in collecting data in nearly real time, or if data collection can be improved, but it seems we can do better in the digital age sand it would certainly be worthwhile for Congress to look into this carefully and see if some investment into data collection would be helpful. If we can give policymakers better and more timely guidance about the state of the economy, it could improve policy considerably, and that would be money well spent.

In any case, let me say one more time as loudly as I can that given the data that we do have, it’s clear that the economy — the labor market in particular — needs more help.