Data Manipulation

[michael perelman <michael@xxxxxxxxxxxxxxxxx>]

This letter is from the 8 August issue of Barrons.  I had always thought
that the BLS was above politics

*Color Us Unconvinced*
/Juiced Data
by Maxim Group/
405 Lexington Ave., New York, N.Y. 10174
*August 2:* We have been watching, with no small degree of skepticism, a
stream of improving macroeconomic 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 the federal deficit to unemployment rates to industrial
output to recent gross domestic product (and its revisions), nearly
every data point comes with an asterisk. When we look back at this
period of economic home runs, we will recall it as 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 eight of the 10 past LEIs were
negative. Hey, if you don't like what the indicators are suggesting, why
not just change the model? That's what happened. Taking a page from the
Bureau of Labor Statistics 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 pom poms to the gymnasium at semester's end.
Don't care much for that? Then consider what BLS hath wrought. Their GDP
revisions for 2005's 1Q 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 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 (versus 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...When the charade finally ends -- probably
after the last of the bears capitulates -- the finale will be ugly.

/-- Barry Ritholtz/


--

Michael Perelman
Economics Department
California State University
michael at ecst.csuchico.edu
Chico, CA 95929
530-898-5321
fax 530-898-5901