Signal extraction

Measuring inflation: Signal extraction redux

Not long ago, we posted a commentary discussing the difficulty of interpreting GDP data. The problem is one of extracting the true signal of economic growth from the noisy way that we measure output.

This signal extraction problem is generic in economics (and other sciences that use statistics). Indeed, one of us began his professional career trying to discern the trend of U.S. inflation. It was 1980 and the inflation numbers were hitting a peak of nearly 20%. The standard operating procedure at the time was to take things like food, energy and some housing-related items out of the index and recalculate them. But that meant removing only the components that had gone up more than average! How could you justify that?

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GDP: Seasons and revisions

Growth from the fourth quarter of 2013 to the first quarter of 2014, originally thought to have been about +0.1% in April, was revised last week to –2.9%. That’s at a seasonally-adjusted, annualized rate (SAAR) – the way the U.S. Bureau of Economic Analysis (BEA) usually reports real GDP growth. News reports varied between shock and concern. Was the anemic recovery over?Or, was it just that this winter was especially harsh?

In reality, these headline growth numbers simply don’t contain all that much information for real-time business cycle analysis...

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