Alan Abelson has a tremendous article in the recent issue of Barron’s where he recounts some of the massive statistical revisionism that accompanied a broad swath of government data released this past week.
In this two part dance, the government first employs some highly dubious statistical tricks, in this case “seasonal adjustments” and then the press runs off with the information often slathering a layer of spin and hype on top of the obviously dodgy data. I wrote about this in my 3 posts last week on existing and new home sales and durables.
Here’s the relevant part from that article (all emphasis mine) – I especially love the opening paragraph:
IT’S A COMFORT IN THIS wildly spinning world to find some things remain the same. We had feared that with the change in administrations, we’d have to revise our long-standing mistrust of government statistics. But, though it is still early days, the initial evidence gives us reason for hope.
The numbers flowing out of Washington seem as dubious as ever, and so are the inferences being extracted from them by more than a smattering of investment strategists, money managers and, it pains us to say, even journalists.
The misleading figures cut across a wide swath of the economy, encompassing housing, manufacturing, employment — you name it. The leading agent of deception, unintentional or otherwise, has been that old sly villain, seasonal adjustment. As it turns out, the seasons don’t need adjustment as much as the adjustors need seasoning.
As Merrill Lynch’s David Rosenberg (who, incidentally, is planning to do a bit of adjusting himself and moving back to his native Canada; our loss, Canada’s gain) points out in a recent commentary, the official keepers of the books have been unusually aggressive in constructing seasonal adjustments for February’s economic data.
To illustrate, the seasonal adjustment for new-home sales was the strongest since 1982; for durable-goods orders, the strongest since they were first released in 1992; the retail-sales figures for February were flat (or, as David says, flattering) after such adjustment, but unadjusted fell 3%, the biggest drop on record.
He also notes dryly that the 40,000 raw non-seasonally adjusted housing-start total for February "all of a sudden becomes a headline-adjusted annual rate figure of 583,000."
Which makes David think that come the inevitably sharp downward revisions of such distorted data, first-quarter real GDP is likely to suffer a 7.2% drop. Which, together with the 6.3% skid in the fourth quarter of 2008, would be the worst back-to-back contraction in the economy in 50 years.
So how exactly does it come to pass, that in the grips of the worst recession in recent history that numerous government statistics are suddenly the recipients of some of, if not the, strongest “seasonal adjustments” on record? Upwards revisions too, it goes without saying.
This simplest conclusion is that the same bureaucratic tendencies towards producing pleasing news that we’ve consistently seen in prior administrations are still in place.
The alternative is that we have to either believe that there’s a perfectly valid reason to massively adjust numbers upwards when the actual data is trending downwards, or that it was a coincidence of such improbable proportions that we wonder if buying lotto tickets is a valid investment strategy.
Why do we care? Because it’s hurting, not helping us. There are few moments in life when self-deception is a useful attribute, and a major crisis isn’t one of them. We need the base data in is purest form so that we can make the right decisions.
Do you think a major corporation would tolerate patently false and misleading sales information for long? If not, then why is this an acceptable practice for a country?
More importantly, this reveals that certain DC institutions appear to be perfectly comfortable being dishonest to the country and its citizens. It reveals an institutional mindset that elevates bureacratic priorities over the needs of the country.
I worry that decisions made from bad data are, nearly always, bad decisions.
There’s an old saying which goes, “people sue relationships, not outcomes.” This means that the doctor with the brusque and impersonal bedside manner is much more likely to be sued than the kind and caring doctor even though both presided over the same patient outcome. Which means that I fret about what happens when these systematic, institutional distortions are revealed to a suddenly dispirited and probably hostile populace. Where bad news can be tolerated, sometimes being lied to cannot.
If I were advising this administration, I would let them know that continuing with these past policies of deception is not only bad medicine, it is dangerous medicine.