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Monday, August 8, 2005
Juiced Data
Investors Insight Publishing
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This week's letter comes to us from my friend Barry Ritholtz, Chief Market Strategist of the Maxim Group and a frequent guest on CNBC and Fox. I have been reading his commentary for several years and he now keeps a Blog called The Big Picture.
The following is a combination of two commentaries about government economic numbers. It is hard to rely on statistical numbers if the government periodically decides to change how they are calculated and Barry takes a look at several statistics. Plus he shows how data can be graphically presented to make the same numbers look completely different, one way positive and the other negative. This is certainly Outside the Box material I hope you enjoy.
- John Mauldin
Juiced Data
We have been watching, with no small degree of skepticism, a stream
of improving Macro-economic data. Color us unconvinced. Many of the
key releases have been fraught with misleading headlines obscuring
much weaker data beneath, and last month was no different. From
Inflation to Federal Deficit to Unemployment Rates to Industrial
Output to recent GDP (and its revisions), nearly every data point
comes with an asterisk.
When we look back at this period of economic home runs, we will call
it the season of steroids. Like Major Leaguers, the Data is on the
Juice.
Take the Leading Economic Indicators (and revisions) from the
Conference Board. The changes to the LEI now register a flattening
yield curve as a positive for future economic activity. Only in the
alternative universe where the Conference Board lives is this
considered a positive. The CB now requires the yield curve to
actually invert before it bodes negatively for future economic
growth.
The Board was apparently not pleased that 8 of the 10 past LEIs were
negative. Hey, if you don't like what the indicators are suggesting,
than why not just change the model? And that's exactly happened.
Taking a page from the BLS handbook (Birth Death adjustment,
anyone?), the Conference Board reduced the utility of LEIs for
investors. Their work now falls into the category of economic
cheerleading.
Kindly return your Pom Poms to the gymnasium at the end of the
semester.
Don't care much for that private group? Then consider what BEA hath
wrought. Their GDP revisions for 2005 Q1 border on the absurd. In
order to crank GDP from its disappointing initial reading of 3.1% to
the more vigorous final 3.8%, the BEA had to make some sketchy
adjustments. Primary amongst their changes was (I am not making this
up!) an actual decrease in Home Prices for Q1. Thus, by somehow
emphasizing unit sales (as opposed to price appreciation), courtesy
of the Price Deflator, GDP became higher in the final read.
Torture the data long enough, and it will confess to whatever you
want it to.
Despite this gamesmanship - or perhaps because of it - much of the
investing public knows only half the story when they read the
economic headlines. The challenge to us is to not only attempt to
discern reality, but to anticipate when the great masses do so also.
It's what has caused us to title research in the past with phrases
such as "Fundamentals Stink: Buy Stocks." When the charade finally
ends - probably after the last of the Bears capitulates - the finale
will be ugly.
(UPDATE: August 2, 2005 9:43pm)
A few quick points: When GDP is calculated, one of the components is
Structures (Residential). That's the line where the new home
construction supposedly dropped in price. The data comes from Census
(part of BEA). Here is the relevant line from the Technical Note,
under "Sources of Revisions":
Investment in residential structures was revised up,
mainly on the
basis of a downward revision to the Census price index for
single-family houses. (Emphasis Barry Ritholtz).
If prices went down, unit production went up. So not only do we have
more output (units built), but since prices theoretically declined,
the price deflator does its thing. Voila! GDP revised from 3.1% to
3.8%! (Hey kids, its magic)
Note also that part of GDP measures new -- but not existing -- home
sales. The transaction of shifting title from one party to another
isn't considered production (nothing gets made), while building a
new residential structure is.
GDP Revised Downwards
I was out on Friday, so I didn't get a chance to review the GDP
revision in the BEA release (I take one day off, and that's what
happens).
Here's the official announcement:
For 2001-2004, real GDP grew at an average annual rate of 2.8
percent, 0.3 percentage point less than in the previously published
estimates. The average annual rate of growth of real GDP from
2001:IV to 2005:I is 3.3 percent, 0.2 percentage point less than in
the previously published estimates. Revisions to year-to-year growth
rates were small.
Revisions to 2002-2004 estimates
The percent change from the preceding year in real GDP was revised
down for all 3 years: From 1.9 percent to 1.6 percent for 2002, from
3.0 percent to 2.7 percent for 2003, and from 4.4 percent to 4.2
percent for 2004.
Those are pretty hefty downward revisions of 0.3%, 0.3% and 0.2% per
year.
Bottom line: The tendency is for the initial read on GDP to be
revised upwards in the subsequent 2 releases (Advance, Preliminary
and Final), and then ultimately to be revised back downwards (closer
to reality) -- at least in this post-recession cycle; I haven't gone
back over the historical numbers far enough to conclude whether this
has occurs in this order traditionally.
As we discussed above in Juiced Data, if you massage numbers long
enough . . . well you know the rest. But the same applies to charts:
Depending upon the scale you select to use, your choice makes the
revision look more or less significant:
Bad:
Not so Bad:
Here's the tell: Anyone who relies upon the initial read is likely
to have a below consensus expectation for growth; those who rely on
the 2 subsequent revisions, will expect above consensus growth.
Conclusion
I hope you enjoyed this exploration of economic statistics and data
presentation. You can see the original report and other commentary
by Barry Ritholtz at http://bigpicture.typepad.com/
Your watching how the data is presented analyst,
John Mauldin
JohnMauldin@InvestorsInsight.com
www.2000wave.com
August 8, 2005
Copyright 2005 John Mauldin. All Rights Reserved.
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