– The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies through research that is nonpartisan, evidence-based and subject to definitive expert review.
CANADA – Policymakers need not be the passive victims of revisions to the economic data they are scrutinizing, according to a report by the C.D. Howe Institute.
In “Revisions to Economic Statistics and Their Impact on Policymaking,” Philip Cross, former Chief Economic Analyst at Statistics Canada, says policymakers can proactively take measures to anticipate revisions.
“To paraphrase Kierkegaard’s observation about life, economic policymaking must be lived forward, but the economy can only be understood backwards, and that backward understanding itself can change due to revisions in data,” says Cross.
Revisions to economic data, with a few exceptions, are part of the normal process of compiling and improving statistics. However, this does not mean they should be ignored, he says.
The author notes the Bank of Canada, for example, found it could predict some revisions to consumer spending and GDP through its monitoring of the use of debit cards. As well, knowing that the GDP estimates might be revised more around turning points means that, during these periods, analysts should build larger confidence intervals around their GDP estimates.
Finally, analysts can put more emphasis on data that are less liable to revision, such as employment or retail sales, while downplaying statistics such as exports that are known to be more variable.
Policymakers have expressed their frustration with data revisions, saying that inappropriate policies sometimes were adopted because misleading data were incorporated into the policymaking process. In the United States, the Fed has been particularly vocal in its criticisms; in Canada, the Bank of Canada has been publicly more discrete.
GDP is a frequent target of such criticisms, although not even the Labour Force Survey has been immune. As a Bank of Canada analyst has noted, policymakers have to deal with uncertainty about the future, the present, and the past when formulating policy. Revisions mean that the inevitable uncertainty about making projections also needs to take account of the lower, but non-trivial, uncertainty about what happened in the past.
“Inevitably, however, analysts must accept that their knowledge of the world will always be uncertain, regardless of the quality of the data. Trying to understand the economy based on data alone risks being so backward-looking that mistakes will be made, irrespective of revisions,” concludes Cross.
