Abstract

News, Noise, and Estimates of the "True" Unobserved State of the Economy

by Dennis J. Fixler and Jeremy J. Nalewaik

Which provides a better estimate of the ``true'' state of the U.S. economy, gross domestic product (GDP) or gross domestic income (GDI)? Past work has assumed the difference between each estimate and the ``true'' state of the economy is pure noise, taking greater variability to imply lower reliability. However each difference may be pure news instead; then greater variability implies higher information content and greater reliability. We analyze various vintages of estimates, developing models for combining GDP and GDI under the differing assumptions, and use revisions to the estimates to show the news assumption is probably more accurate.

JEL classification: C1, C82.

Keywords: GDP, statistical discrepancy, news and noise, signal-to-noise ratios, optimal combination of estimates, business cycles

First draft: August 2004

This draft: January 2006

Updated: January 31, 2006