How Misleading Are The Headlines On Sector Growth?

by: Steven Hansen

Most readers know I have issues with the U.S. Census headline data. The data does not add up against itself. When I was a negotiator, one of the tools used is to run your opponent in a loop - and see if the numbers equal to the numbers they submitted.

My analysis of Census economic releases seem to constantly state that the data is worse than the headlines - normally due to the month-over-month change which is headlined. I have looked at 3 major economic releases from Census - and how their month-over-month headlines stack up against the Census current data.

Admittedly, the quibble is not normally whether the data is better or worse than the previous month, but the size of the change. However, from time-to-time I disagree even with the direction of the change.

One should not expect total correlation as the headlines are based on preliminary data. However, with good data gathering and seasonal adjustment methodology - the errors should balance out over a particular year.

The durable goods headlines seem to correlate reasonably well with the eventual final data. The error over a year resulted in an understatement of gains by 1.5% or an error of a little over 0.1% per month in stating the month-over-month gains. If this was the worst seen in the data and some other things were better, this might not be too bad.

Click to enlargeBut correlations go down hill from here. Here is Census Manufacturing which the headline month-over-month gains have overstated the real gains on average by approximately 0.2% each month

Click to enlargeThe same amount of overstatement appears in Retail of about 0.2% per month.

Click to enlargeYou might be thinking that a 0.2% error is not big deal - but it is distorting the real gains by a factor of 2 to 3 over a year. When an economy is chugging along at 2% per year, these overstatements mislead those who extrapolate this data. There appears to be consistent overstating of the month-over-month change during periods of decline.

Am I saying there is a conspiracy to overstate? Nah, even though I tend to believe nothing is as it seems. What I am saying is:

  • That Census is sloppy with its seasonal adjusting methodology (algorithms);
  • Many believe that overstating economic conditions make consumers and business act in a manner that the overstatement will become self-fulfilling;
  • Few consumers of data ever goes back and checks past month-over-month gains - therefore there is little pressure to reign in overstatements;
  • No government employee will be reprimanded for saying things are better than what they are, but heaven forbid if they would imply that things are worse than they are. Therefore errors in government analysis will always tend to be overstatements.

It is prudent to pay more attention to year-over-year gains which are harder to overstate, and ignore the headlined month-over-month change.

My normal review of economic releases is in my instablog.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.