economics

Data Watch: Why Do Economic Data Get Revised?

~ economicsforeverydaylife ~ Leave a comment

Data on the economy are not precise and get revised over time. Why? The early estimates of economic data like GDP are initially released based on partial information. We only get more complete information later—sometimes much later.

Government statisticians face a tradeoff between timeliness and accuracy. If the government wants to release only GDP numbers that are very accurate, it would have to wait for a long time before releasing any data at all. For example, a fairly accurate measure of GDP for 2024 will be released by the government statistical agency (the Bureau of Economic Analysis, BEA) at the end of September 2025. That’s a long time to wait to get a comprehensive measure of how much output was produced by the U.S. economy. Instead, we got a first estimate of GDP for 2024 in January 2025, and it was revised in February and again in March. But more complete source data are available by the end of September, and the number for 2024 that will be released then will be much more accurate. For that reason, it is crucial that policymakers understand the process of producing the data.

Recently, some policymakers have focused on the revisions to the employment data for May and June 2025, and wondered if they might have been manipulated for political purposes. But the data on employment are routinely revised, sometimes by a significant amount. We need to remember that those data are monthly, and the size of the data revisions was puny, because monthly movements in the data are small. The revisions in question were less than 0.1 percent of the total number of people employed. However, it is true that the revisions were relatively large, compared with other revisions to the number of people employed at firms. Only 4 percent of all revisions from the first release to the second release since 1964 were larger in magnitude than the revision of the June value. Only 7 percent of all revisions from the first release to the third release since 1964 were larger in magnitude than the revision of the May value.

But I wonder why people focus so much on monthly data in the first place. Monthly data are very noisy—our measurement is not precise and many random things happen in a month. It would be preferable to look at quarterly data or even annual data. When you average a data measure over longer periods, you smooth out the noise and get a more precise measure. With quarterly averages, 15 percent of all revisions from the first release to the third release were larger than that in the second quarter of 2025; while 17 percent of all revisions from the first release to the second release were larger than that of the second quarter of 2025.

So, our analysis of past revisions going back to 1964 suggests that the revisions that just happened to the employment numbers were larger than normal, but far from the largest, and many revisions in the past have been even larger.

Even more importantly, the fact is that government data agencies follow strict rules for how they conduct their work. They follow well-established procedures for how to deal with the raw source data they get and then generate from those incomplete numbers the overall values of the data series being produced. If you look at when the largest revisions to GDP and employment have occurred in the past, you see that unusual events led to large revisions. The largest revisions to the GDP data occurred in the stagflation of the 1970s, the 9/11 attacks, the financial crisis in 2008, and the pandemic in 2020. Large employment revisions occurred in similar time frames. It is possible, and worth further exploration, that the cuts to government employment in 2025 by DOGE were not counted well by the BLS. If so, perhaps some modification of BLS procedures could be in order. But it is difficult for a government statistical agency to anticipate that type of shock, and modify its procedures to account for it, before it happens. In my studies of data revisions over the past 25 years, I have learned a lot about the data production process. The key thing to remember is that if data were not revised, the data would just be wrong forever. Data revisions improve the precision of the data. We are fortunate that U.S. data are among the best in the world, and always getting better, especially after they are revised.

Data Watch: Introduction to Inflation

~ economicsforeverydaylife ~ Leave a comment

Prices of the goods we buy seem to be getting higher and higher every year. Inflation is caused when the central bank (the Federal Reserve in the United States) allows the amount of money in circulation to grow too fast, or equivalently, if the central bank sets interest rates too low. Inflation causes the value of your money to decline, so you bear a direct cost.

What Does a Dollar Buy Today?

When inflation occurs, prices of goods rise, on average. So, a dollar buys less than it used to buy. How much is a dollar worth today, compared to the past?

As the table suggests, a dollar buys nowhere near what it used to. It now takes $8 to buy what $1 bought in 1962.

To get an idea of how much prices have changed in a year, we can calculate the inflation rate as the percentage increase in prices from one year earlier. The graph below shows the results of this calculation from 1960 to 2025.

In the chart, you can see that inflation in the early 1960s was very low. But inflation began to rise steadily in the late 1960s and into the early 1970s. Then, from 1974 to 1975, inflation jumped to double-digit levels. Inflation dropped for a short time later in the 1970s, but jumped up again in 1979 and 1980. Inflation began to decline in the early 1980s, rose a bit in the late 1980s, and then declined to below 2 percent in the 1990s. The 2000s saw volatility in inflation, though on average inflation remained fairly low. The inflation rate was negative for a short time in 2009, mainly because of a sharp decline in prices during the financial crisis. In the 2010s, the inflation rate remained below 2 percent, which is sometimes thought to be the optimal rate of inflation. But in March 2021, inflation jumped up sharply, as the effects of the pandemic subsided. Today, the inflation rate is about 2.5 percent.

What Causes Inflation?

In the short run, inflation can rise or fall from a number of factors, especially from temporary increases in food or energy prices. But in the long run, it turns out that only an economy’s central bank determines the inflation rate.

Historically, most of the periods in which a country has allowed inflation to reach high levels, as in the United States in the 1970s and early 1980s, were periods in which the central bank of the country allowed the amount of money in circulation to grow at a faster pace than it should have. The central bank is the entity that is in charge of distributing money in a country; in the United States, the central bank is the Federal Reserve, called the Fed for short. In the 1970s and early 1980s, the Fed made severe errors in judgment. The Fed’s leaders thought that the Fed should increase the money supply at a faster pace because the economy was growing slowly. But the increase in the money supply caused high inflation and did not help the economy grow faster at all.

Here is a plot of the relationship between the growth rate of the money supply and the inflation rate from 1960 to 1979. As you can see, increases in money growth were followed by higher inflation rates about two years later. Decreases in money growth were followed by decreases in inflation about two years later. This illustrates one of the difficulties the Fed faces in setting monetary policy—it doesn’t know if its policy was right or wrong until two years have passed. Then, if it has made a mistake, it takes another two years to correct it.

Another difficulty the Fed faces in setting monetary policy is that innovations in the banking sector cause the demand for money to change and this disrupts the relationship between the growth rate of the money supply and the inflation rate. In the graph above, which showed data from 1960 to 1979, you can see that as the money growth rate changes, the inflation rate responds with a lag of about two years. But the relationship changed after 1980 because of technological improvements in the banking system, which led the Fed to abandon the attention it paid to the money supply. Essentially, after 1980, U.S. money demand became so erratic that the Fed could no longer judge the appropriate size of the money supply necessary to control inflation. So, it gradually switched to a different method, which was to judge the appropriate level of the interest rate in the economy. Instead of money demand driving inflation, the idea is that the nominal interest rate on short-term securities needs to be at the right level. If the interest rate is too high, then inflation will decline; if the interest rate is too low, then inflation will rise. However, the difficulty in this approach is figuring out what the appropriate level of the interest rate is when conditions in the market are changing.

Today, inflation is about 2.5 percent. The Fed targets it at 2 percent, so inflation remains higher than desirable. It is the Fed’s duty to reduce it to 2 percent over the next few years. Given how the Fed operates, the current inflation rate calls for the Fed to increase interest rates slightly now, to bring inflation down to a lower level.