Beware Data Revisions!

by: Alan Hartley, CFA

[Author's Note, 7/30: This article has been revised since original publication to correct one specific June 2012 core capex revision. Our article utilizes non-seasonally-adjusted data. In tracking down historical revisions, we accidentally included one revision to a June 2012 seasonally-adjusted data point. The revised article removes the seasonally-adjusted data point as well as adds additional historical background for more clarity.]

Today the U.S. Department of Commerce reported new orders for manufactured durable goods. One data point often analyzed by investors within the report is non-defense capital goods ex aircraft, also called “core cap ex”. Many consider the figure a good proxy for business capital spending in the U.S.

That is all well and good, but we find the data less useful than most.

Why? Heavy revisions.

Take June 2011 and June 2012:

Click to enlarge

Non-defense capital goods ex aircraft (non-seasonally-adjusted) for June 2011 was originally reported as $70,631. It would be revised three more times over the next two years and settle 3.6% lower than originally reported.

Non-defense capital goods ex aircraft for June 2012 was originally reported as $67,693. The following month it was revised to $66,452. Today, the June 2012 figure was revised again to $68,555. Over the course of the year, June 2012 looked as though it had fallen 2.5% from June 2011, only to be revised today to show an actual gain of 0.7%. June 2012 will likely be revised yet another time.

Now, varying between a year-over-year decline of 2.5% to a gain 0.7% may not seem like much to you, but there are many market pundits that make the case for recession or expansion based on these figures–figures that will ultimately be revised several times and show different economic activity levels at each revision.

Today core cap ex was reported as $72,733, some 6.0% higher than 2012. Take this with a grain of salt. Core cap ex for June 2012 has at least one additional revision while the June 2013 figure has three more to go.

Investors who rely on this report do so at their own peril. It’s pretty useless in real-time and subject to multiple revisions.

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.