Juiced Data By Barry Ritholtz 8/8/05

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Volume 1 - Issue 47http://www.investorsinsight.com/images/otbemail/spacer.gif August 8, 2005 http://www.investorsinsight.com/images/otbemail/grayDark.gifJuiced Datahttp://www.investorsinsight.com/images/otbemail/spacer.gif By Barry Ritholtzhttp://www.investorsinsight.com/images/otbemail/spacer.gif
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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
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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 2001:4Q to 2005:1Q 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:

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Chart courtesy of ArgMax (http://www.argmax.com/mt_blog/archive/000557.php#000557)
Not so Bad:

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Chart courtesy of Northern Trust (http://www.northerntrust.com/library/econ_research/daily/us/dd072905.pdf) (The full data can be found at BEA (http://www.bea.gov/bea/dn/home/gdp.htm))
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.
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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/ (http://bigpicture.typepad.com/)

Your watching how the data is presented analyst,

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John F. Mauldin johnmauldin@investorsinsight.com (mailto:johnmauldin@investorsinsight.com)

[rokid]

WW,

Interesting article. Thanks for posting it.:^

The govt does not put out false data.

This article is wrong. :P

I have to say the birth/death module adding 651K jobs that ARE NOT real is a stroke of genious thou. :shock:



2005 Net Birth/Death Adjustment (in thousands)


Supersector
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec



Natural Resources & Mining

-5
0
0
0
1
1
1







Construction

-60
9
31
34
38
29
-11







Manufacturing

-38
3
6
1
8
8
-21







Trade, Transportation, & Utilities

-50
9
25
18
26
23
-25







Information

1
3
-1
11
7
0
-3







Financial Activities

-7
9
9
13
10
11
-13







Professional & Business Services

-115
21
56
64
19
25
-15







Education & Health Services

7
14
8
21
14
-1
-11







Leisure & Hospitality

-6
28
37
90
75
81
32







Other Services

-7
4
8
5
9
7
-10







Total

-280
100
179
257
207
184
-76

This article is wrong :P

MIGRATING TOWARD MEDIOCRITY
By Dan Denning

It is nice to step back from the world of mainstream media,
where I have been making the case I made in The Bull
Hunter. The mainstream media is reluctant to embrace the
ideas I've outlined, or at least to follow them through to
their logical conclusion. And what is the logical
conclusion, you might ask?

America is creating jobs over 207,000, according to the
Labor Department last week. But when you look closer,
50,000 of those jobs were in the retail business. Most
commentators viewed this with anxiety, but for the wrong
reason. The conventional wisdom is that the report
indicates inflationary pressures and that the Fed will have
to keep raising rates. In reality, the bigger concern is
that American jobs are being created, on average, at lower
average hourly wages.

This is the vaunted shift to the "service" economy, driven
by spending. Step back for a second and ask yourself this
simple question: How does a nation get rich spending money?
If you have a good answer to that question, let me know.

In the meantime, the other big drivers of employment growth
were construction and government. In fact, since 2001, over
two-fifths of new jobs have been in housing related
industries (construction, real estate, mortgage lending).
This is just one example of how housing-centric the U.S.
economy has become. In a healthy economy, business
investment creates new employment, which in turn creates
new incomes and jobs. Business spending (out of the pool of


available saving) comes first. Consumer spending comes
next.

In an economy run by economic illiterates, consumer
spending (through debt and home equity extraction) is
praised. Savings fall to zero. No mention is made that the
main drivers of employment and GDP growth are based on
debt.

No mention is made that American wages are in a soft, slow
motion swan dive as a result of a globalized labor market.
No mention is made of a study by McKinsey & Co. that up to
9 million white-collar jobs may be outsourced, in addition
to the 3 million manufacturing jobs that have already left
these shores.

And no mention is made that Great Britain and the United
States did not get rich by consuming and spending. They got
rich by producing and trading. At the national and the
personal levels, you accumulate capital by producing more
than you consume and deploying the accumulated savings on
new capital and income-producing assets.

It's not rocket science. In fact, economics used to be
called moral philosophy. It was, and is, the study of
choices people make with money. But the choices people make
with money are driven by values, and those values, even
when exercised in the economic realm, are essentially moral
choices.

I've been asked what America can do to turn things around,
to get competitive, to fight back. My suggestion is that
the most American thing of all to do is to take care of
yourself and your family. There are some economic and
monetary policies that could help. But I wouldn't count on
getting that help. Not anytime soon.

In the meantime, paper assets driven by low interest rates


are going to keep going down. Hard assets, driven by
intense global demand for scarce resources, will go up. You
will see rising prices in hard assets (like $64 oil) and
falling prices for financial assets and stocks. This
sorting out (or "reckoning," if you prefer) is just now
getting started.