- The Washington Times - Saturday, February 28, 2009

The decline in the economy late last year went from bad to worse - way worse - as the Commerce Department revised its first estimate of the change in GDP, or gross domestic product, for the fourth quarter.

There can be a substantial change from one estimate to another - which is exactly what happened with the figure that came out Friday, showing a 6.2 percent drop in GDP, revised from an earlier estimate of 3.8 percent.

Here are some questions and answers about GDP revisions, and why the number can change so dramatically.

Q: How many GDP estimates does the government make?

A: The Commerce Department’s Bureau of Economic Analysis takes three cracks at estimating economic activity for any given quarter.

The first crack is called the “advance” estimate. The one for the final three months of 2008 was issued Jan. 30.

Then, the second crack - which was released Friday - is called the “preliminary.” The third estimate is called the “final”; for the fourth quarter, the “final” estimate will come out March 26.

Then, once a year - usually in the summer - the BEA comes out with “annual” GDP revisions, which can mean changes to all the quarterly figures.

Q: Why do these GDP numbers get revised in the first place?

A: Updated, or revised, estimates are based on more complete information.

Q: What kind of information was lacking when the government released its first crack at fourth-quarter GDP?

A: The government was missing information on businesses’ inventories of merchandise stored in warehouses, and didn’t have full information on trade or on construction activity.

“Those are big holes to plug,” said Brian Bethune, economist at IHS Global Insight.

The government takes its best stab at estimating this information in its first crack at GDP. But Friday’s report showed the number crunchers were way off in filling in some of the blanks.

For instance, the biggest culprit behind the downgrade from the government’s old fourth-quarter estimate to its new one: a flip-flop in business inventories. Businesses actually cut them, versus building them as the government originally thought. And that served to reduce - rather than add to - economic activity.

U.S. exports suffered a bigger drop than first thought, another factor playing into the weaker GDP fourth-quarter figure.

Consumers and businesses both retrenched more, too. All told, these factors contributed to the largest revision on records dating back to 1976.

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