A man with one clock always knows the time. A man with two clocks is never sure.
This week brings the two heavyweights of economic statistics. On Thursday morning we got the latest read on economic growth, and on Friday we learn how the job market fared in May.
Government statisticians and outside commenters usually emphasize a particular headline number in these reports. For the economy as a whole, it’s the annual growth rate of gross domestic product (GDP), which logged in at a mediocre 1.9 percent in the first quarter. For jobs, it’s the number of nonfarm payroll jobs created in the past month (115,000 in April, but that will be revised on Friday morning).
In each case, the government also reports a second measure of essentially the same thing. Jobs day aficionados are familiar with this. The payroll figure comes from a survey of employers, but the Bureau of Labor Statistics also reports results from a survey of people. That provides the other famous job metric, the unemployment rate, and a second count of how many people have a job. The concept isn’t exactly the same as the payroll measure–it includes a broader array of jobs, for example, but doesn’t reflect people holding multiple jobs–but it’s sufficiently similar that it can be an interesting check on the more-quoted payroll figure.
The downside of this extra information, however, is that it can foster confusion. In April, for example, payrolls increased by 115,000, but the household measure of employment fell by 169,000. Did jobs grow or decline in April?
Another, less well-known example happens with the GDP data. The Bureau of Economic Analysis calculates this figure two different ways: by adding up production to get GDP and by adding up incomes to get gross domestic income (GDI). In principle, these should be identical. In practice, they differ because of measurement challenges. As Brad Plummer notes in a piece channeling Wharton economist Justin Wolfers, the two measures tell somewhat different stories about recent economic growth. In Q1, for example, GDI expanded at a respectable 2.7 percent, much faster than the 1.9 percent recorded for GDP. Is the economy doing ok or barely plodding along?
Such confusion is the curse of having two clocks. We can’t be sure which measure to believe. Experts offer good reasons to prefer the payroll figure (e.g., it’s based on a much larger survey) and GDP (e.g., income measurement is difficult for various technical reasons, including capital gains). But there are counterviews as well; for example, at least one paper finds that GDI does a better job of capturing swings in the business cycle.
Despite this confusion, two clocks are better than one. They remind us of the fundamental uncertainty in economic measurement. That uncertainty is often overlooked in the rush to analyze the latest economic data, but it is real. There are limits to what we know about the state of the economy.
In addition, a weighted average of two readings may well provide a better reading than either one alone. If one clock says 11:40 and another says 11:50, for example, you’d probably do well to guess that it’s 11:45. Unless, of course, you have reason to believe that one clock is better than the other.
The same may well be true for GDP and GDI – the truth is likely in the middle. (This is less true with the jobs data; because of the larger sample, I weight the payroll measure much more heavily than the household measure, at least for monthly changes.)