A short note on the application of Chow test of structural break in US GDP

In 1997, the U.S. Department of Commerce Bureau of Economic Analysis (BEA) switched reporting gross domestic product (GDP) and other national accounts from Standard Industrial Classification System (SIC) to North American Industry Classification System (NAICS). NAICS was developed jointly by the U.S. Economic Classification Policy Committee (ECPC), Statistics Canada, and Mexico’s Instituto Nacional de Estadistica y Geografia (INEGI), to allow for a high level of comparability in business statistics among North American countries. NAICS is constructed within a supply-based, or production-oriented, conceptual framework where establishments using similar production processes to produce goods and services are grouped to form industries. NAICS allows for the identification of 1,170 industries compared to the 1,004 found in the SIC system. These differences are substantial. Thus, the objective of this short note is to apply a simple Chow Test of structural break to determine if this test is capable of identifying the structure break in US GDP due to the switch from the SIC reporting system to the NAICS reporting system in 1997.

The knowledge of structural break in U.S. GDP is important for a number of reasons: Firstly, a structural break may affect any or all of the underlying model parameters in U.S. GDP, which have different implications.  For example, different researchers using the U.S. GDP data can easily reach quite opposite conclusions -- hardly an example of sound scientific practice. Secondly, despite the fact that US GDP is the most widely studied macroeconomic variable, yet, as popular news media regularly report, it is constantly and closely monitored by investors, academics as well as government officials all around the world. Thirdly, not only leading econometrics text books have used, in many cases, US GDP to illustrate examples of various time series data analysis, many highly influential economics journal articles, such as Nelson and Plosser (1982), Engel and Granger (1987), Perron (1989), Zivot and Andrews (1992), to name a few, have used GDP in their analysis. Last but not least, the National Bureau of Economic Research (NBER) uses GDP to declare whether and/or when the US economy enters and exits recession. Thus, shedding light on the previously unexplored characteristics of US GDP is justified.