Economic Growth Picture Is a Series of Snapshots

The government made what seems like a large boo-boo a month ago.

The nation’s economy grew at a 3.6% rate in the second quarter, the Commerce Department said Thursday, a far faster pace than the 2.2% rate the agency estimated a month ago,

How could the feds have been so wrong? Yet another example of government incompetence?

And why should we care anyway? Does the upward revision mean an overheating economy that will spark higher inflation, forcing the Federal Reserve to jack up interest rates, thus killing the economic recovery and the greatest bull market ever?

As it turns out, the huge revision--the biggest such change in 3 1/2 years--was the result of some honest limitations in the way the government collects data. Uncle Sam’s statistical gnomes know what they’re doing after all.

And, at least this time around, there is no need to panic over inflation and interest rates, most analysts said. Yes, the economy is growing, but the revised rate is still lower than the overheated pace of the first quarter.

More important, inflation numbers were not revised upward in the Commerce report, so the Fed isn’t likely to tighten credit anytime soon, analysts reasoned. Indeed, bond yields fell on Thursday after the report was released.

Thursday’s revised estimate was simply the latest and best guess of the Commerce Department, where economists have the virtually impossible task of portraying the reality of a $6-trillion economy with a handful of numbers.

The changing projections are like a series of snapshots, the first vague and cloudy, the later ones more precise.

“A whole bunch of estimates go into the first number, and our technical term for an economic estimate is a guess,” joked Martin Regalia, chief economist for the U.S. Chamber of Commerce and an enthusiastic consumer of federal statistics.

The first projection, issued a month ago, is called the “advance” estimate of the nation’s gross domestic product, which is the total of everything that’s happening in the U.S. economy, from production of new cars to purchases of movie tickets to weekend getaways in Las Vegas.

The advance estimate always comes out 30 days after the end of the quarter. July’s announcement that the GDP rose at a 2.2% pace covered economic activity from April through June.

But two important items were missing from the initial second-quarter estimate. Figures on inventories--finished goods on shelves in stores, in wholesale warehouses and at manufacturing plants awaiting shipment--were available only for April and May. And trade figures--exports and imports--also were limited to April and May.

Because it takes longer to gather the full information for inventories and trade, Commerce Department experts use a combination of hard data and anecdotal information to project what really happened. In other words, they produce “a middle-of-the-road guess,” said Steve Landefeld, director of the Commerce Department’s Bureau of Economic Analysis, which generates the figures.

“If a number is not anywhere near the middle of the range, we will miss it,” acknowledged Landefeld. This time, the jump in inventories held by merchant wholesalers was one of the largest in 15 years. In trade, “there was a bigger improvement than we or anyone else anticipated,” said Landefeld.

Because of these surprises, the “preliminary” GDP estimate issued Thursday was revised upward from last month’s advance estimate. It was the biggest change since a revision in the fourth quarter of 1993.

The number may have changed, but the general trend has been confirmed, Landefeld said. The numbers show an economy in which growth is slowing, compared with the first quarter of the year, when business activity surged at an annual rate of 4.9%.

Therefore, Landefeld said, his staff succeeded in its primary mission: to supply “the most timely information we can possibly produce which still gives a relatively accurate picture of economic activity.”

With the economic expansion in its seventh year, and the stock market so volatile, any variation in numbers could set off a stampede on Wall Street these days.

As it turned out, the Dow Jones industrial average lost 92.90 points, or 1.2%, to 7,694.43 on Thursday. But many analysts said the stock market’s recent problems--the Dow has fallen 6.8% from its record high set on Aug. 6--have less to do with the trend in the U.S. economy than with concerns that blue-chip stocks have simply gotten far ahead of themselves and their companies’ earnings prospects.

In fact, traders in the bond market--who are most likely to panic at economic data that suggest higher inflation ahead--actually were cheered by the GDP revision, because a closer look at the report showed evidence of still-tame inflation: A key price measure tied to GDP rose at a scant 1.5% annual rate in the second quarter, the mildest in five years.

Bond investors also were heartened by the rise in business and retail inventory levels, which could force companies to slow production in the future--and thus dampen growth in the current quarter, keeping any inflationary pressures at bay.

While blue-chip stocks dove, the yield on the 30-year Treasury bond, a benchmark for long-term interest rates, fell to 6.57% Thursday, from 6.65% Wednesday.

Presidents and members of Congress watch the numbers, too, always eager to claim credit when things are good and heap blame when the indicators go down.

“The economy continues to turn in a stellar performance,” Jeffrey Frankel, a member of President Clinton’s Council of Economic Advisers, said in a statement Thursday.

Perhaps the most important watcher of these numbers is the Federal Reserve Board, which is always poised to raise short-term interest rates if it thinks the economy is in danger of overheating and triggering higher inflation.

The latest upward revision in the GDP--while inflation remained tame--will simply add to what is already the major debate at the Fed: Can the U.S. economy grow at a faster pace than what has historically been possible without inciting inflation?

Fed Chairman Alan Greenspan hinted to Congress in July that the Fed is open to the idea that the economy has entered a new era where faster growth can be permitted because the risk of rising inflation is muted by global competitive forces. But Greenspan stressed that the Fed simply does not yet know whether that is true.

For now, Greenspan is under heavy political pressure to take his cue in setting interest rates largely from the actual inflation numbers, rather than on the speed of the economy’s expansion, inventories, or other measures.

If Greenspan sticks with that approach, he probably won’t be losing sleep over the latest GDP report.

Yet another reckoning of the GDP and inflation will be offered next month, when Commerce issues its final figure for the April-June quarter.

Stay tuned.

Times staff writers James Gerstenzang in Edgartown, Mass., Tom Petruno in Los Angeles and Times wire services contributed to this story.