Gross Domestic Product Grows at 2.0 Percent or 2.3 Percent

The Bureau of Economic Analysis (BEA) reported today that the U.S. real Gross Domestic Product (GDP) grew 2.0 percent last quarter over the previous quarter at an annual rate. But if you compare GDP in the most recent quarter with the same quarter in 2011, real GDP grew at a 2.3 percent annual rate.

Europe – indeed most other countries – report GDP growth on a percent-change-from-the-previous-year basis, comparing the most recent quarter with the same quarter last year. In other words, how big was the economy in July/August/September 2012 compared with July/August/September 2011, after adjusting for inflation?

But not here. In the U.S., the Bureau of Economic Analysis (BEA) reports real GDP growth on a percent-change-from-previous-quarter-at-an-annual-rate basis. In other words, how big was the economy in July/August/September 2012 compared with April/May/June 2012, adjusted to an annual growth rate instead of quarterly and adjusted for inflation?

Why the difference? Beats me. It could just be a case of, “We’ve always done it this way”, or even “We’re the U.S. and we’re different”. I know that the U.S. clung to Gross National Product (GNP) over Gross Domestic Product (GDP) for years even though the rest of the world was reporting GDP. So it’s possible that the BEA is just being conservative.

Regardless of the reason, I prefer the change from previous year to the change from previous quarter, and not just because it makes the U.S. number more comparable to the rest of the world.

First, looking at the annual changes gives a clearer picture of the longer term trends. It also is less susceptible to distortion due to one-time changes and thus doesn’t have as much random variation. That make it less noisy, as economic signals go.

Finally, the annual number eliminates the confusing “quarterly change at an annual rate” concept. Sure, I understand what that means, but do most people? Why make things so complicated and convoluted?

Of course, as is usually the case in economics, there’s a trade-off. While the change from previous year shows trends better, it doesn’t show immediate changes quite as clearly. Focusing on the annual change thus could make it hard to spot a turnaround right away.

On balance though, I prefer yearly to quarterly. When it comes to economic data, I’ll take smooth over noisy any day.

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