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How calculating GDP is like making a gravy

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The Federal Reserve Bank of San Francisco says our rough winter weather skewed the data on gross domestic product (GDP) growth for the first quarter. GDP grew at just two-tenths of a percent at the beginning of the year.  

Was it really that bad? Or were the numbers just not crunched enough?

“Of course, it’s always hard to separate the wheat from the chaff,” says Glenn Rudebusch, director of research at the San Francisco Fed.

The Bureau of Economic Analysis (BEA) calculates GDP growth, and Rudebusch says the BEA makes seasonal adjustments as it gathers each piece of data. But he thinks there should be another seasonal adjustment at the end of that process.

Rudebusch compares it to making gravy.

“There’s a lot of things in there that maybe you don’t want in your final dish, so you want to reduce it down and get the real essence of flavor,” he says.

In economics, you’re trying to get rid of all the extraneous noise, so you can see underlying economic trends.

“I think they’re onto something,” says Ken Kuttner, a former Fed economist who now teaches economics at Williams College. “And what the San Francisco Fed has uncovered is, well, maybe there’s a slightly better way to do it.”

How much do these GDP numbers matter? Well, the Fed uses them to decide whether it’s time to raise interest rates. But it also looks at other things.

“The most important data is the unemployment rate. It’s the single best indicator of labor market conditions,” says Chris Rupkey, chief economist at MUFG Union Bank.

But, lately the unemployment rate and GDP numbers haven’t jived.  The unemployment rate is getting steadily better, as GDP fluctuates. The San Francisco Fed says its number crunching formula could smooth out those differences, too.

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