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 PomPoms to the gymnasium at the end of the semester.
Don’t care much for that private group? Then consider what
BLS 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 BLS 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. Its 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 mine).
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.
Lastly, a Brain Freeze™ caused me to type BLS instead of BEA. Those responsible for this error have been sacked.