Steven Hansen's  Instablog

It is obvious to those who have lived in the real world, that one cannot accept theory as fact. We naturally understand that there are billions of variables and dynamics in play - and the trick is to understand dominance. We know from the real world that:

• it is impossible understand all the forces in play,
• we know a certain percentage of all decisions (depending on the decision maker 10% to 20% are wrong) because literally all decisions are make without 100% of the needed information,
• a good manager believes he made the right decision but is more than willing to change a decision as additional info flows in,
• that an organization must monitor effects of a decision to understand its effectiveness.

Sometimes I wonder if economists have this understanding? Many economic studies appear to be data mined (they start with a theory and prove it ignoring data which does not fit). The other problem in the economic community is ostracism - once you try to "prove" mainstream theory is incorrect - you can kiss off advancement or positive recognition.

There are grains of truth in all economic theory - but the application of theory to a particular situation is where we run into trouble. My issue is the data gathering, and methodology of analysis. I believe that we are monitoring the wrong pulse points because we have lost sight of the forest for the trees.

Another issue is that we are gathering economic data unnaturally - and in my experience, this creates a data base so flawed that it gives the wrong answer. One data gathers using existing systems that the sectors use to control their own work. Take employment - you would use social security data with IRS data - not go out and survey. This is not a perfect method, but the answers would be consistent. It is hard to believe the large monthly variation in the seasonally adjusted data for the BLS Jobs Report is not caused by data gathering.

The Econintersect economic forecast for December 2012 shows weak growth. The underlying dynamics continue to have a downward bent. There are recession markers still in play, and one of our alternate methods to validate our forecast is recessionary. All in all, not a great forecast - but not one which would cause you to jump out the nearest window either.

ECRI believes the recession began in July 2012. ECRI first stated in September 2011 a recession was coming . The size and depth is unknown. The ECRI WLI growth index value has been weakly in positive territory for over three months. The index is indicating the economy six month from today will be slightly better than it is today.

(click to enlarge)

Initial unemployment claims rose from 361,000 (reported last week) to 350,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here).

The real gauge - the 4 week moving average - continued to fall from 367,750 (reported last week) to 356,750. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

(click to enlarge)

Bankruptcies this Week: AuraSound

Data released this week which contained economically intuitive components (forward looking) were:

• Rail movements (where the economic intuitive components indicate a moderately slightly expanding economy).
• There were many important data releases this week which some use to forecast - durable goods, personal income - even gdp - I see little intuitive in these measures except trend lines.

All other data released this week either does not have enough historical correlation to the economy to be considered intuitive, or is simply a coincident indicator to the economy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.