×

US GDP numbers: First-quarter growth is routinely understated

In a world where markets react strongly to any hint of a possible downturn or a possible Fed rate hike, the distribution of growth by quarters can matter.

Along with Friday's disappointing second-quarter growth data, the government reported normal annual revisions for the past three years and they support CNBC research that first-quarter growth has been routinely understated.

The Bureau of Economic Analysis, for the first time, acknowledged the broad finding of CNBC's work last year that the problem with strange first-quarter weakness goes back three decades. CNBC found first-quarter growth going back to 1985 was just 1.87 percent, while overall growth was 2.7 percent.

Brent Moulton, associate director for national economic accounts at the BEA, told reporters in a briefing this week that the BEA is doing a long-term review of the history of GDP because "there is some evidence going back as far as 30 years for residual seasonality." Residual seasonality is the term used for data that still shows seasonal patterns even after it's been seasonally adjusted.

More immediately, over the past three years, the BEA made several improvements in seasonal adjustments and incorporated more complete data. It found overall growth from 2013 to 2015 was as reported at 2.3 percent. But looking at how growth is now distributed between quarters, the BEA found first-quarter average growth over the past three years is now 1.2 percent, up from 0.5 percent. What was gained in the first quarter was taken away from the second, where average growth was lowered to 2.5 percent from 3.2 percent.

In a world where markets react strongly to any hint of a possible downturn or a possible Fed rate hike, the distribution of growth by quarters can matter. The BEA made a big change to the first quarter of 2015, when an originally reported decline of 0.2 percent sparked worries about recession — and influenced Fed policy accordingly. Since the original reports, the first quarter of 2015 had been revised up to 0.6 percent increase. Friday, the BEA revised it up again to average growth of 2 percent, suggesting there was never reason for concern over the economy. The second quarter of 2015 was revised down to 2.6 percent from 3.9 percent.

The first quarter of 2014, which had been reported as low as -2.9 percent, now stands at -0.9 — for a 2 percentage point, positive swing.

Counting the $17 trillion U.S. economy is a difficult task, and international comparisons show the U.S. about in the middle of the pack among developed nations when it comes to revisions. The BEA is clearly making efforts to remove additional seasonal patterns from the data.

For investors, the changes and the revisions are a warning not to take any single quarterly number by itself. The average revision to a quarter from the first print to revisions in later years can be plus or minus 1.3 percentage points.

CNBC research shows the best picture of the economy comes from averaging prior quarters with the current data.