How The BEA Goosed 3rd Quarter GDP------With A Phony 74% Leap In Defense Spending

The White House

And from this a thousand conspiracy-themed blog posts will be born. Here is Capital Economics on the surprisingly strong (3.5% vs. 3.0% forecast) third-quarter US GDP report:

– The reported leap in third-quarter defence spending, which added 0.7 percentage points to annualised  GDP growth was, as far as we can tell, largely due to a failure of the BEA’s seasonal adjustment  process. As a result, we expect defence spending to plunge this quarter, subtracting a similar amount  from fourth-quarter GDP growth.

– All of the upside surprise in third-quarter GDP growth (the 3.5% outturn was well above the consensus  forecast of 3.0%) can be explained by the 4.6% increase in government spending, which added 0.8  percentage points (ppts) to overall growth. Moreover, nearly all of that boost was due to a 21% leap in Federal defence consumption. That’s the largest increase since the second Iraq war in  early 2003. Drilling down further, more than two-thirds of the rise was due to a 74% annualised leap in  defence spending on support services for installation, weapons and personnel. This is unusual given that  spending on such services typically makes up just 25% of total defence spending.

– Some of the rise in the third quarter could be due to the escalation in military action in the Middle  East, but most of it appears to be due to a failure of the seasonal adjustment process. Looking at the  averages over the past five years, defence support services spending has increased by 38% annualised in  the third quarter only to fall by an average of 34% annualised in the fourth quarter. (See Chart 2.) The BEA all-but confirmed this problem when in an email it told us that it is “trying to determine if any  methodology changes are necessary”.

Wow. Given that Bureau of Economic Analysis (part of the Commerce Department) email, it looks like there may be, if not a mistake committed, then at least sub-optimal methodology at play. Now I don’t think this was intentional or nefarious in any way. So relax. But given that this report came out just before the midterms, I am sure some will view it with great suspicion.

http://www.aei.org/publication/surprisingly-strong-us-gdp-report-cause-statistical-error/spicion....

 

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