Friday Rant: One More Time – Periodic Economic Statistics Have Dismal Predictive Validity
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Our revered and precious freedoms of speech and press — in fact all of our sovereignties — carry with them tremendous individual responsibility to question, validate and determine the relevance and accuracy of the informational deluge they enable. The challenge, of course, is how to fulfill this responsibility amidst continuously expanding communication and information technology. Ironically, and fortunately, those very same technologies make it easier than ever to separate the wheat from the chaff, but we must be willing put forth the effort to do so.
This past week’s release of quarterly economic statistics presents a prime opportunity to remind ourselves that the numbers/statistics are just those. They are not necessarily — or hardly ever, for that matter — “economic indicators” as many economists and nearly all consolidated, ratings hungry news media might like us to believe. One need not to have ever taken a course in calculus or statistics or understand standard deviations to cultivate an intuitive sense of what matters and what doesn’t amongst this quarterly numbers frenzy.
As cases-in-point, let’s take a look at a couple of headlines and the numbers that challenge their validity: (Obligatory caveat: Stock brokers live and die by the market’s daily knee jerk reactions to periodic statistics so if you’re a day trader, stop reading and get back to work.)
– In Today’s NYT from Reuters In Mixed Economic Reports, Scant Hope for Improvement. Yet the article states “… new claims for jobless benefits fell last week to near a four-year low… an unusual pattern for summer factory shutdowns kept hopes in check that the weak labor market was improving… new orders for long-lasting manufactured goods rose in June although a gauge of business spending plans declined, pointing to a slowdown in factory activity… contracts to buy used homes fell unexpectedly in June, a worrisome sign for the housing market… Initial claims for state unemployment benefits dropped 35,000 last week to a seasonally adjusted 353,000, the Labor Department said, near a four-year low touched this month… the Commerce Department said durable good orders increased 1.6 percent in June, mostly because demand for aircraft surged.” And one of the kickers pertaining to a “four-year low” in claims for unemployment was “That was a much sharper drop than economists had expected.”
– And a separate Times column header claims Decline in June Home Sales Reinforces Uneven Recovery. While reporting “Sales of new homes recorded the biggest drop in more than a year in June… [also reported is that] Home construction in June hit its highest level since October 2008 and confidence among home builders this month was the highest it has been in more than five years, reports showed last week.” Yelena Shulyatyeva, an economist at BNP Paribas in New York is quoted saying “Housing will continue to recover gradually throughout the year, but fundamentals are not supportive of a fully fledged housing market recovery.” Oh, I almost forgot this one, “May’s sales pace was revised to show 13,000 more units than previously reported. New home sales were up 15.1 percent, compared with June last year.”
Who cares if a statistic is lower or higher than “economists” or “an economist” predicted? Economics is a notoriously imprecise discipline by economist’s own admissions. It’s potential value is in modeling long term past trends, practices and circumstances in hopes of evolving a future model that has greater predictive validity than past models – a worthy but very frustrating endeavor. So the sky isn’t really falling even though the ozone layer continues to evaporate, and the economy is a swinging pendulum that may or may not show meaningful progress over the coming years. But whatever “measures” of economy are reported month to month, quarter to quarter or even year to year (especially a year in which a presidential election is in full swing) are simply not relevant enough to foster excitement or malaise.
Paul Krugman today, in a fascinating (agree or not) Times op-ed piece titled “Money For Nothing sums it up best — albeit in a slightly different context — when he says “So it’s time to stop paying attention to the alleged wise men who hijacked our policy discussion and made the deficit the center of conversation. They’ve been wrong about everything — and these days even the financial markets are telling us that we should be focused on jobs and growth.” …And also, the lynch pin of our nation’s economy and future, education, lest a growing number of citizens become increasingly incapable of thinking for themselves.
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