A Dash of Insight

Employment Situation Preview: A Risky Outlook

Each month we report the results from our payroll employment model.  This is not really a forecast.  We take a number of different economic indicators from the middle of the preceding month and ask what change in payroll employment is consistent with the other data.  The variables are not causally related, but are all different measures of the economy.

We get a pretty good fit from the University of Michigan sentiment reading (yet another new low this month), the four-week average of initial claims (using the period ending in mid-month), and the ISM manufacturing report.

The data are all consistent with continuing weak economic growth and a loss of about 90,000 jobs.  The market is looking for a loss of 60,000.  Since the 90% confidence interval (sampling error only) is about +/- 100,000, we think that an actual gain is pretty unlikely, while a big loss is possible.

It is interesting that whatever is reported is overly hyped and interpreted as an official count, rather than as a statistical estimate.

Readers interested in learning more can do three things:

1. Take a look at last month's article, where we explored forecasting issues.
2. Check out Little Known Facts about the Payroll Employment Report.  They are still little known!
3. Try playing our Payroll Employment Game.  It shows you the range of different results the BLS might get even from a well-designed survey.  It is cheaper than trading the actual report.

When the Blogosphere Works -- and When it Doesn't

At "A Dash" we have an ongoing interest in how consumers--especially investors-- can get useful information from the Internet.  It is one of the chapters in our book, where will consider in detail the various Internet sources.  It is important to understand what one can and cannot learn from the Wild West Blogosphere.

Background

Abnormal Returns, one of our long-standing featured sites, helps investors learn what they should be reading.  It takes a lot of work to read and consider scores of different offerings, selecting a few to include in the daily list of readings.  The comments helpfully suggest the nature of the content.  We look for this guidance every day, and so should you.

We think of our "Abnormal Friend" as an editor who considers whatever we present.  While "A Dash" is not a traffic-driven business, we are always interested in the "editor's" reaction to our work, and we appreciate getting some new readers.  Without readers and their comments, our job would be more difficult.

On occasion, the author of Abnormal Returns, an investment professional with impressive credentials, steps out of his normal role and becomes an author.  This is almost always interesting.

The Issue

In a stimulating and provocative article, Abnormal Returns points out the advantage of the blogosphere over mainstream media.  The article cites another of our featured sources, Adam Warner, as follows:

Do you remember the incident last month when a noted writer went off on the editor of one the most successful sports blogs? Adam Warner at the Daily Options Report has a nice post on the topic of how the blogosphere helps sort through competing claims. It is not always a pretty process. A site like ours helps play a small role in this by pointing out the current schools of thought. We like how Adam concludes:

To me, it’s ultimately a meritocracy, albeit an imperfect one. There are some great blogs that get lousy readership and some lousy ones that top the charts. But by and large, it sorts itself out…

This is a strong argument, one well worth our attention.

A Problem?
As we would expect, it does not always work so smoothly.  As so often happens, considering extreme cases helps to highlight the key variables.  Let us consider one of the finest hours for the Internet in action.

They call it "Rathergate."  Too bad.  This was a sad end to a distinguished career.  To summarize briefly (full story here)  in the 2004 Presidential election campaign there was a big issue about George W. Bush's military service. CBS ran with a story about the President's military service, using documents from his commander, then deceased.

Within hours, significant challenges to the story appeared on the Internet in blogs and forums.  Several sources noted discrepancies that called into question the authenticity of the documents.

Key Criteria

The challenge to CBS worked for several reasons:

• There was widespread interest.  This was important news, about an important issue.
• The key question played to the strength of the Internet -- there were relevant experts out there, and this was a good way to reach them.
• The evidence was clear and easy to understand.  The interpretation of various typefaces and other evidence did not require any special training.  The average reader could see, understand, and reach a conclusion.
• CBS could not "stonewall."  Other media sources understood and took up the case.

How Does this work in the Investment Blogosphere?

Simply put, it does not.  Let us suppose that a big-time pundit (think CBS) puts forth an outrageous claim that can be proved to be incorrect.  Of the many thousands reading the claim, a few note the error.  Let us go back to the key criteria.

• There is no widespread interest.  Readers are uninterested in disputes, (he said this, he said that, blah blah).  Unless the specific question is large, it becomes a death by a thousand cuts.  Many distortions build a false picture.
• There are relevant experts, but their incentive to challenge CBS is lacking.  Most of those writing on the Internet are driven by traffic.  It is not wise to "step on Superman's cape" so most experts will not do so.
• The evidence may not be obvious to the lay observer.  It is there, and quite understandable, but it requires a few minutes of reading.  This gets beyond the hurdle for most readers.  It is not the graphic "set shot" of the Rathergate memos.
• Superman can stonewall.  He needs only to act "put upon."  There is no incentive for anyone to challenge him.  In fact, the incentives are the opposite.  Suppose you are writing a relatively new blog for a MSM outlet.  Your success and your job are related to traffic.  Would you rather get some friendly recommendations from Superman or get into his Hall of Shame?

Conclusion

Abnormal Returns has raised on important and provocative question.  We suspect that he might eventually be correct.  It will require something far beyond his normal role.  The gatekeepers will need to be more like movie reviewer par excellence Roger Ebert, willing to criticize and review information instead of merely linking.  For the moment, the blogosphere does not have the self-correcting mechanisms that are needed.

Here is a simple test.  If the New York Times ran a story that had an error -- one that could be proven -- there would be a correction.

Do we see such corrections in investment blogs?

The Unemployment Severity Index

The BLS collects and publishes a massive data collection.  No single researcher can appreciate all of it, but there is something there for nearly everyone.

There is a problem that can come from too much data.  Journalists must make choices about what to report.  How does one determine the real story?

Background:  Measures of Unemployment

Last week we applauded the effort of Barry Ritholtz at The Big Picture, one of our featured sources, to broaden media coverage of unemployment data.  Barry sought to give a lot of publicity to the broadest possible measure of unemployment, a rate much higher than U3, the traditional measure.

We agreed in concept, and proposed that he add his strong voice in proposing that the media also report the BLS measure of those unemployed for more than fifteen weeks.  This measure, while lower in absolute terms, has (like the other measures) moved higher during the current economic weakness.

We were disappointed that Barry did not embrace this proposal. He clarified his position in comments on our post, suggesting as follows:

Does U1 help reach that goal? I guess it does -- if you believe that the U3 measure of employment is OVERSTATING unemployment (which I don't).

To begin with, we realize that the distinctions involved make the eyes of the average reader glaze over.  That makes our task more difficult.  It also makes the reward greater for the (very) few readers who grasp the entire issue.

So we should all understand that Barry uses his own conception of the state of national unemployment as a starting point, and then wants the media to choose a measure which conforms.  He is concerned that the media reports have not grasped the full extent of current economic distress.

We wonder?  Really?  If anything, the general public and the media have overplayed economic problems for several years.  The percentage of the public perceiving negative economic conditions or recession has significantly exceeded the ratio of professional economists.  The bad economy story is "man bites dog."

At "A Dash" we recommend something quite different:  Use data to form your conclusions.  Be willing to change your opinions as you get new data.  It is an old-fashioned idea, but it works.

(We are also disappointed that he did not respond in his comment to our point that he had made a flat-out mistake in asserting that the BLS had changed the definition of the U3 series.)

A Fresh Approach to the Unemployment Question

We were delighted to hear from an old friend and colleague, Marty Finkler.  Marty has the highest and purest of motives -- teaching young people what they really need to know, without bias or preconceived conclusions.  We listen to him carefully, and so should you.

Marty wrote to comment on our unemployment rate article.  First, he agreed with the idea of informing the public about the wide range of measures.  He also highlighted an approach, unemployment severity, which he attributes to a decades-old book by Charles Baird.  (Readers please inform us about good citations.  We know that the ECRI considers unemployment severity).

The unemployment severity index is calculated as follows:

One takes the standard U3 measure of unemployment, multiplies by the mean duration of unemployment (in weeks) and multiplies by 5 to convert to days.  The result is the average number of days someone in the labor force is unemployed during a given year.  Marty's chart, based upon BLS data, is shown below.

One can readily see that by this measure, the unemployment severity is not at an unusually high level.  While it reflects the economic weakness shown by other data, it is nothing like the peaks from prior times of economic distress.

Conclusion

We thank Marty for his observations.  He has shared some other ideas, so readers can look forward to more information from a great source.

Secondarily, but more important to some, is the idea that one can profit from understanding data.  If many are engaged in making things seem worse than they really are ---the conclusion is easy.

Opportunities abound.

Measuring Inflation? You try setting the rules!

At " A Dash" we are continually amazed at the difficulty in stimulating anyone to reconsider existing opinions.  This seems especially true on the subject of measuring inflation.  There are plenty of self-proclaimed experts.  Taking a step away often helps us shake off biases and get a fresh look at the problem.

Here is a little test.  Try to give an honest answers to each question below.  We shall suggest the relevance in the conclusion.

Measuring Inflation and Related Concepts

Here are a few interesting situations related to inflation measurement concepts.  Please take a moment to make an actual answer to each question.  Doing so will make the experience much more valuable.

1. A company comes out with a new package size for a product.  The size is 50% larger and the price goes up by 25%.  Should we view the price of the product as lower, unchanged, or higher?
2. The price of homes is going up, but interest rates are moving lower.  One person sells an existing home and buys another.  Both homes increased by 20% in price during the prior year.  The second person remains in the same home with the same mortgage, living next door to a place that went up by 20%.  The third person, who also lives next door, refinances his mortgage to pay off the loan much more quickly with the same monthly payment.  Two of the three people are paying no more for their housing, although the home price went higher.  One is paying of the mortgage faster.  How would you measure the increase in home prices, given the decrease in payments?
3. You are told that a group of 24 other countries has adopted some rules about private accounting.  (Forget things like FAS 157 and marking to market -- those are out!  International accounting does not follow these rules.)  Do you think that this is a good argument for U.S. accounting to follow suit?  What if the other countries had different rules about free speech?  About voting?  About religion and education?  Briefly put, does the fact that a group of other countries does something mean that the U.S. should also, without regard to the actual values and merits?
4. Let us suppose that the price of a car in year X is $15,000.  A few years later the car has the following improvements:
   • Anti-lock brakes -- improving safety.
   • Side bars to protect in side collisions.
   • Air bags to protect in frontal collisions.
   • Fuel injection and computerized sensors to improve fuel economy.
   • Stronger and safer tires.
   • A life expectancy of 150,000 miles instead of 50,000 for the earlier car.
   • Better cup holders, including both warming and cooling.
   • If the car still sold for $15,000, would you say that the actual price had decreased or remained the same?
5. You are trying to measure recreation costs for a typical Chicago family that likes sports.  The Bulls use their #1 draft pick to choose the next Michael Jordan.  To help with costs, they raise ticket and concession prices by 30%.  You give up your Bulls tickets and instead buy more tickets to the Bears, marked down after failing to get a Quarterback in the draft and releasing their top running back. You spend the same amount of money to watch football instead of basketball.  Has there been an increase in the price of recreation?

A Second Look at the Bill Gross Argument

If you gave honest answers to the questions above, you are now qualified to read (again?) the Bill Gross commentary that got so much buzz.  We suspect that few read it carefully the first time, and fewer still read it with a critical eye.

See if the conclusions have the same black-and-white quality that they did when cited in the media.  We shall continue this series with our own analysis.  In particular, we shall review how actual economists (as opposed to non-economist pundits and fund managers) look at these problems.

Inflation measurement is central to many current economic and market questions.  As we have noted, it is important to use unbiased and authoritative sources.

Forecasting the Payroll Employment Number

Each month credit and equity market observers alike pounce on the Employment Situation Report from the Bureau of Labor Statistics.  Markets gyrate wildly when the actual result is 40,000 or 50,000 payroll jobs away from the economic forecasts.

This is a big mistake.  Here is the problem.  The level of change that the market believes to be significant, is not great enough to be measured by the BLS tools.  It is like measuring a hair with a grade-school ruler.

And that is just the measurement issue.  It is even more difficult to forecast the results.  We always enjoy reading Bob McTeer, whose blog is one of our featured sites.  His recent commentary notes that economists are not very good at forecasting.

Unfortunately for the reputation of economists with the general public is that they think the job of economists is forecasting.  That's unfortunate because economists can't forecast very well.  It just can't be done.  Economists know that, and most will admit it, but they are stuck with it, especially if they wish to be employed as an economist outside academia.

His main point is that these predictions are difficult.  People making forecasts should provide probability figures and ranges.  (For a similar argument, check out Barry Ritholtz on The Folly of Forecasting).  The problem is that when the forecaster is honest about the error range, the consumer becomes less interested.  Well, so be it!

McTeer has a number of excellent points on using models and some Greenspan stories, so enjoy reading the entire article.  After noting that most everyone is a "closet extrapolator" he writes as follows:

I've always been amazed at economists who presumed not only to see around a corner, but to see around more than one corner, as in "the economy will pick up through year-end, then slow for several months, and then take off again stronger than ever."  To me that sounds as silly as what they would say to the waiter after sniffing a wine cork.

It is something to think about the next time you hear some elaborate, multiple-turn economic or market forecast.

So with this in mind, here is our monthly update on the employment report, (also appearing in the Columnist Conversation on RealMoney).

The Employment Report

Each month we take a look at the likely change in payroll employment jobs, given other economic data. This is not really a forecast, since the data are all contemporaneous indicators of current economic conditions. We simply use the already reported data to ask what we expect from the payroll number.

Our model takes Michigan Sentiment (hitting new lows), the ISM index (hanging in there at just under 50), and the four-week moving average of initial jobless claims (weak, but not recessionary). Be careful not to consider today's jobless claims numbers. The non-farm payroll report is based on a survey where respondents are asked to tell about employment during the week including the 12th of the month. Revisions to the report come because many employers do not submit the information on time. Some never report, since for many there is no legal requirement to do so. The BLS tries hard to make it easy, and get a complete response.

Our approach suggests a loss of 82,000 jobs, weaker than consensus guesses of -60K or so, and much weaker than the ADP estimate. It may surprise readers to learn that losses in this range are still consistent with modest GDP growth of 1% to 1.5%, as are the other economic numbers. I don't recommend any big bets, since the 90% confidence interval on the survey is +/- 100,000 jobs! And that is after all of the reports are in and revisions done. The excessive attention to this report creates a dangerous trading situation. You can make your own (risk-free!) guesses at our Payroll Employment Game site. This shows you that even if you know the answer in advance, the reported number can be far away. The "official" answers will eventually converge on the "truth" but there is plenty of error along the way. In addition to this resources, you can check out some other little-known facts in this prior article which has links to other references.

Government Conspiracies and Your Money

At "A Dash" we are amazed almost daily by the haughty and high-handed disrespect from Wall Street when it comes to the everyday workings of government.  So many powerful voices are so confident, and simultaneously so wrong.  This is typical when an expert switches subjects from something he really knows about-- stocks, trading, technical analysis, etc.-- to something he knows nothing about.

CNBC stimulates this with their "guest hosts" who are encouraged to offer an opinion on whatever topic comes up that hour.  Of course, some of their journalists are already participating in that way.  Looking to the frequently-cited wise men, Jonathan Berr runs down a short list, but there are many more good candidates.

When we see the errors, it is a "kid in a candy store" feeling.  Start with a bunch of traders, fund managers, and lawyers.  None has ever developed a quantitative model, and many cannot construct or interpret simple tables or regressions with statistical controls.  They have not taken (or do not remember) the beginning classes in government, economics, statistics, or research methods.

These pseudo-experts cite actual data, developed with great care by the strongest experts, as "a work of fiction."  As if they knew the difference!  Why?  Two reasons.

First, they do not like the result they see.  It does not agree with their own daily experience.  They confuse their own compartmentalized view of the world with reality.  It is also a message they can sell to their audience, often a niche group who share their world view.

Second, diminishing the real experts increases the influence of the pretenders.  If these powerful voices can convince most to ignore data, then anecdotal evidence rules.  It is an alternate data universe.

And the pseudo-expert is also the master of the anecdote.

The most prominent media voices support them.  Why?  It is a good story.   There are very few who choose to educate readers rather than to play to their existing biases.  It is a good business model.  Readers can understand anecdotes, but not statistical methods.

There is a symbiotic relationship between media and the pseudo-expert community.

Conspiracy Theory

Taken to the extreme, the pseudo-expert actually suggests that "government" is acting in a conspiratorial fashion.  It is pretty easy to recognize such superficial analysis.  It is the work of people who have seen too many movies and read too few books.

The biggest red flag?  Look for those who discuss the U.S. "government" as if it were a  unitary actor.  This is seen only in a ruthless dictatorship with a small inner circle.  Those who conclude, for example, that the President is "cooking the books" on inflation or employment data make this mistake.  They do not understand that the actual work is being done by a non-partisan senior executive service.  (Those interested in how government decisions are actually made should consult our summary article.)

A Failed Conspiracy

Actually, conspiratorial moves are rare and for good reason.  Even closely held secrets, like the original Watergate plan, have a way of leaking out.  The recent suppression of the global warming report provides a nice example.  Menzie Chinn at Econbrowser, one of our featured sites, discusses the report that the Bush Administration thought was too dangerous to release, now available after four years.

This Washington Post article shows what happens when the echelon of political appointees tries to tamper with the work of those who serve government regardless of the party in power.

This is an important example to remember the next time someone is selling a conspiracy theory that you should not be buying.

Investment Effect

One of the strongest things an investor can do is to discover information that is poorly understood or appreciated by everyone else.  It is especially ironic that the commonplace viewpoint is offered as "contrarian" by those taking it!

Briefly put, one can gain an investment advantage simply by identifying and believing information from the real experts on various economic topics.  How simple!

Where to start?  Here's a hint.  The "government" as represented by the diverse Congressional and bureaucratic interests has no unified position about the measurement of inflation.  Many members of Congress, for example, would like to increase Social Security benefits and labor cost-of-living increases.  They would be happy to see inflation measurements that would aid these constituent groups. The BLS employees have tenure and are not subject to political pressure.

Meanwhile.....

Big-name fund managers like Bill Gross have a strong financial interest in public perception of inflation and the economy.  Like any smart manager, he talks his book.  Should you be listening?

More later on Bill Gross versus the BLS, now in its fifth year, but still playing on a blog or TV station near you.

ISM Interpretation: Watch that Decimal Point!

Today's ISM number for May came in at 49.6, slightly below the level indicating expansion in manufacturing, but a touch better than expectations.  Is the ISM report important?  We'll look first to news reports and pundits, and then provide our own take.

News Interpretations

Bloomberg gave a balanced account, noting economic forecasts as follows:

Economists forecast the index would decrease to 48.5 from 48.6 in April, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from 46 to 50.5.

and also...

ISM's gauge of new orders increased to 49.7 from 46.5, while a production measure rose to 51.2 from 49.1, ISM said.

The Wall Street Journal's Real Time Economics has the usual nice collection of economic reaction.  The title, "Economists React: ‘Severe Recession Has Been Averted’?" captures the main theme.  The economic data have been good enough to cause many to reconsider their recession predictions.  Read all of the comments for yourself, but the consensus indicates a greater chance of Q2 GDP at a rate of 1.5% or so.

Significance of the Report

At "A Dash" we always wonder how economists can make forecasts of survey results like this one or of consumer confidence.  The analysts at Briefing.com share this concern.  The following describes their concern:

This is a highly over-rated index.  It is merely a survey of purchasing managers.  It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse.  It does not weight for size of the firm, or for the degree of better/worse.  It can therefore underestimate conditions if there is a great deal of strength in a few firms.  That may well be what is happening at present with exports booming at large firms, but not necessarily across all manufacturing sectors.  The current readings on the ISM manufacturing index are providing a more negative view of conditions than the actual industrial production data.  The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle.  It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends. 

We see the ISM data as a contemporaneous economic indicator that we analyze along with payroll employment.  We have frequently warned in the past when we expect a surprising negative result with market impact.

To summarize, this was good news, showing an economy that is growing below trend but defying the recession predictions.

An Alternative Viewpoint

Over at The Big Picture, one of our featured sites, Barry Ritholtz, the self-styled gonzo economist, had a different view about what we should see in this report.  He pounced with the "Bad Headline of the Day."  His point was that the article called the report a gain in manufacturing activity, which it was not.  He did not, however, mention that the report implied a higher GDP than was expected.

We congratulate Barry on noting the decimal point error of the headline writers, but we are left wondering about the main story.  Does he believe that this was bad news?  Also, this is a survey.  Is he considering the confidence interval and statistical significance?  Can we be confident that the null hypothesis of "Not 50" can be rejected?

Big Picture Reader Contest

The quibble over the decimal point created a mini-contest in our office.  We started arguing about data interpretation on The Big Picture.  We have recommended this site since our inception, and we read it daily, usually with great care.  We also watch Barry on TV, as do our clients.  Sometimes we dig into the archives, usually when we are trying to answer a question like "What did people think was wrong with the market in June, 2004?"  The answers are all there.

But back to the contest.  We offer a prize to the reader who can find an article on The Big Picture where Barry analyzed the data and suggested that the results were more positive for the market or the economy than the official report suggested.  The prize goes to the most recent entry.  It must be a regular report, of the sort listed on the Briefing.com calendar, where Barry's interpretation was more bullish than the report seemed to indicate at face value.

Conclusion

Each economic data point shows an economy slogging along below trend, at great cost in terms of lost potential, but not as bad as many expected.  Today's economic numbers were pretty good, but were overwhelmed by the S&P decision about future writedowns for some investment banks.

We shall look at the payroll employment report forecast later this week.  Meanwhile, our indicators respect the tape.  We are more cautious in the intermediate term.

Comparing Data Interpretation

Explaining and displaying data combines art and science.  The information itself is objective, as are calculations of trends and changes.  Despite this, there is an element of artistry.

A professor leading a class is motivated to help students find the truth.  One of our old professors described a certain statistical technique as grabbing the data around the neck, squeezing, and insisting, "Speak to me!"

If one starts with a conclusion, however, it is often possible to find support within almost any complicated economic report.  The analyst can look at changes from one period to another, or year-over-year.  One can look at seasonally adjusted or unadjusted data.  One can reject the overall number and look to "internals".  In such a case, the key question is whether the chosen indicator provides important information.

A Case Study: Today's GDP Report

With so many forecasting a recession, or insisting that the current period of slow growth will finally be judged as a recession, many are interested in the official report on GDP.  The estimate for growth in Q1, 2008, was revised upward to an annualized real rate of 0.9%.  While this is well below economic potential, it stayed in positive territory.

Since every economic report comes with plenty of commentary, let us consider the interpretation of the GDP data from three different sources -- all respected analysts who are among our featured sources.

We have provided extensive quotations, much more so than usual, but there is a reason.  Readers should take a few minutes to look carefully at each interpretation and see what conclusions they find.

Gary D. Smith

In his excellent "Bottom Line" summary Gary analyzes the Bloomberg report of the data and draws his own conclusions, including the following:

The economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to another record, Bloomberg reported. Jeffrey Frankel, an economist at Harvard Univ. who is a member of the panel that dates US economic cycles, said in a Bloomberg Radio interview, “I wouldn’t rule out going into recession” later in the year. This statement implies that he doesn’t currently view the slowdown as a recession, in my opinion.

and also this:

The gain in growth last quarter would have been even greater if not for a decline in estimates for inventories. Companies cut inventories at a $14.4 billion annual rate versus an initial estimate of a $1.8 billion gain. Inventories added only .2 percentage point to growth, less than the previously estimated contribution of .8 percentage point.

and finally this:

A measure of total sales, which excludes inventories, was revised to a gain of .7% at an annual pace rather than a .2% drop that was previously estimated. I expect 2Q GDP to easily exceed economists’ estimates of a .1% gain and growth to accelerate modestly into year-end on fiscal/monetary stimuli, lower commodity prices, decelerating inflation, an end to the American Axle strike, a firmer US dollar, inventory rebuilding, an end to the credit market turmoil, strong exports, diminishing housing fears and an improving job market.

Barry Ritholtz

Those reading the Barry Ritholtz blog (and that includes nearly everyone) might get a strikingly different picture.  Barry's key bullet points were as follows:

-Weakest two quarter growth since 2001 recession;
-Private inventory investment added 0.81% to GDP growth;
-Final Sales of domestic product: (GDP growth - private inventories) 0.7% (-0.2% previously)
-Personal consumption expenditure unchanged at +1%  (slowest since Q2 2001)
-Gross private domestic investment: -6.5% (previously -4.7%);
-Residential investment "improved" to -25.5% from -26.7% (most since 1981);
-Business fixed investment: -7.8% (improved from -9.7%);
-Exports weakened to +2.8% from +5.5%;
-Imports weakened to -2.6% from +2.5% ;
-Federal Government consumption expenditure and gross investment: +4.4% (+4.6% previously);
-State and Local Govt: 0.6% (+0.5% previously)

Barry also helpfully notes that if one subtracts trade and inventories, a key indicator according to Merrill Lynch's David Rosenberg, the actual quarter-over-quarter figure was a decline of 0.1%, indicating a "fragile economy."

Briefing.com

Briefing.com provides a timely and comprehensive analysis of every economic report.  Here is their bullet-point summary:

• The revised rate of 0.9% for Q1 GDP was due to an upward revision to net exports (0.6% additional contribution from 0.2%), and nonresidential structures (0.2% higher to 0.0%), and to inventories (0.6% lower to a 0.2% contribution).  All of these were about as expected as the March data on the trade balance, construction spending, and business inventories were out after the advance GDP report and all suggested changes of about this magnitude.
• The revision set GDP trends up for close to a 2% real gain in Q2.  Inventories will add about 0.5% to GDP if there is simply no more liquidation, and net exports and real PCE enter Q2 above the first quarter average.  Any modest improvement in these components in April-June will boost GDP solidly. 
• Real PCE (personal consumption expenditures) rose at a 1.0% annual rate.  This ultimate measure of consumer spending shows that lower home prices and higher gas prices have only dampened consumer spending, not produced declines.  Real PCE is tracking for another gain the second quarter.
• Exports continue to rise sharply and provide a boost to GDP.
• Housing (residential construction) remains a disaster and will continue sharply lower in Q2.  It is now down to just 3.8% of total GDP. 
• Business investment in equipment and software has been surprisingly resilient and will continue near flat in Q2.
• Nonresidential construction has started to weaken and will be a drag on Q2 GDP.
• Inventories provided a modest boost to Q1 GDP (due to a slower rate of liquidation) after taking a slice out of Q4.  Inventories will add further to GDP in Q2 as some accumulation might occur.

Their conclusion is as follows:  The recession has been postponed. (Read the entire article for a more complete analysis).

Our Conclusion

For today, the conclusion is up to the reader.  Three of our favorite sources seem to reach three different conclusions.  What is wrong?  Can we find an inaccurate statement?  Which approach does the best job of illuminating reality -- making the data really "speak?"

The key question is "How many readers can "cut through the spaghetti?" (as a key member of our team often puts it.)

Scooped by Muckdog

On our blog agenda there is a discussion of the "alternate data universe."

There is a rich and thriving discussion of economic data among economists -- that would be the "real economists".  We are talking about those who are (preferably) in the academic world or working on Wall Street.

There is another discussion.  It occurs mostly in the cottage industry of those making a business of criticizing the official government data.  As we have noted, government is an easy target.  The only representatives who speak in public are the political actors.  The hard-working, non-partisan, intelligent staffers do not have any access to the media.  That makes organizations like the BLS an easy target.  They are not paid to go on CNBC.

Attacking the non-farm payroll report, GDP, or inflation data is an inviting target for the gonzo-economists, the non-economists, and those with a paid-site business model.

We were looking for a way to describe this "alternate universe" and even had the Twilight Zone in mind, but we were scooped by Muckdog.  (Regular readers of "A Dash" sometimes ask why we recommend Muckdog, with whom we have never spoken, when his source seems to lack the official credentials we admire and is also anonymous.  The answer is simple.  We are not advocates of credentialism.  We do hold anonymous sources to higher standards of helpfulness.  We include them among featured sites when there is a real investment payoff.)  Muckdog gets to the point much better than we would:

From Barry Ritholtz:  GDP Alternate Measure. It's the whole conspiracy theory thing about understating inflation and overstating GDP.  Maybe "alternate universe?"  Sure, but those make for good Twilight Zone and Star Trek episodes, no?  And Barry's always a good read.

The Choice for Investors and Traders

It is pretty simple.  One can go into the Twilight Zone where no official report means anything -- there is always something wrong.  The prime source for this, which we will not link to, is a paid site on a mission.  The serious economists do not cite this source.  The bearish non-economists frequently do so.  The mainstream media, with a couple of exceptions, do not travel this path.  It is a trail which requires certain dubious assumptions:

• "Government" is some unitary actor, like the manager of a business, with a mission of punishing certain people -- mostly senior citizens, in an effort to cut costs and balance the budget.
• The Boskin Commission was some sort of conspiracy with this aim in mind.
• Various Administrations and the Fed have joined forces to foster this approach.

In the beginning government classes students learn that we have a pluralistic society.  Many different interests are represented, and quite effectively.  Senior citizens have a special  pull with Congress, since they represent a powerful voting block.

In fact, the Boskin reforms, discussed in a bipartisan Commission, have been reviewed by economists.  If anything, the adjustments to CPI are still inadequate.  CPI remains overstated.  As we have noted, that is what the Fed believes.

Investors have a simple choice.  They can choose to follow the alternate universe, where  everything has gotten  much worse over many years during a time when wealth increased.  This is an ideological choice, not an investment choice.

Alternatively, investors can accept the debate among real economists, those trying to generate accurate data, and those offering real public policy alternatives about economic issues.

Conclusion

Like the many economic sources available on the Internet, we are not going to engage in a debate on specific calculations.  It is too time-consuming  to fight this battle when the alternative universe has this as a single-minded mission.

A trader or investor who wants to profit is well-advised to deal with the data generally accepted in the economic and investment community.  If no one with real credentials chooses to engage in a discussion of the findings, that is meaningful and should be respected.

An Anecdotal Afterthought

Our mission at "A Dash" is helping investors and traders.  We were in some doubt about whether this was an important issue until we had a recent visit from one of our most intelligent and informed investors.  He asserted that some of these issues were "controversial."

We were surprised.  We suggested an analogy of the debate over cold fusion.  This theory, suggesting a potential for vast energy creation, was almost universally disputed by a broad spectrum of scientists.  Nonetheless, it won popular support, some grant money, and some academic followers.  This was a controversy principally among non-scientists.

There is plenty of room for debate over data and findings.  Unless you are yourself an expert, your mission should be in discovering and following the real experts.

That is what we do at "A Dash."

Informational Power: Interpreting the Payroll Employment Report

What is the market impact from the interpretation of data?

It is an open and free debate, but there is a problem.  The results follow from advanced statistical methods and processes.  Even the smartest hedge fund managers, columnists, and pundits cannot draw independent conclusions.  They did not take the right classes.  They never did any time series modeling or survey research.  Briefly put, they lack the necessary skills to evaluate most data.

The result:  Nearly everyone relies upon the analysis of those accepted as experts.  What choice is there?

This is a recognized principle in social science, called the two-step flow of communications.

Application to the Monthly Payroll Employment Report

When do we know that data interpretation has a market impact?  One test might be the widespread citation of a conclusion.

Our "go to guy" for those on the NYSE floor is Art Cashin.  In his daily comment (very valuable and available to UBS customers) he wrote as follows:

Payroll Numbers – Three pros, Dennis Gartman, John Mauldin and Greg Weldon each deconstructed the non-farm payroll data. Their conclusions were that the data was, actually, anything but bullish. Things are not always what they seem at first glance.

So the perception on the floor relies on these influential interpreters of data.  What are their sources?

John Mauldin

John Mauldin does a number on the number!  Even though this is an extended excerpt, readers need to check out the entire analysis.

Without that addition from the birth/death number, total private employment would have dropped by 296,000. Now, if that had been the headline number, the market would have tanked. Now, I have no doubt that the economy did create a lot of new jobs last month. But when the final revisions are in, we will see that job losses were well south of 100,000. If memory serves me correctly, the BLS had to add about 800,000 jobs that they missed during the recovery in 2003-4. (The birth/death model misses job growth during recoveries, the opposite result of the miss in slowing periods.) They did this just last year, in a major revision of the data. We will see the same type of revisions in 2010, only this time it will be downward.

And even the BLS says that the birth/death numbers have little statistical meaning. The following is from their own website (courtesy of Dennis Gartman) [emphasis obviously mine]:

“Birth/death factors are a component of the not seasonally adjusted estimate and therefore are not directly comparable to the seasonally adjusted monthly changes. Instead, the birth/death factor should be assessed in the context of its effect on the not seasonally adjusted estimate... The components are not seasonally adjusted separately because they do not have particular economic meaning in and of themselves.”

Mauldin also cites Gartman and The Liscio Report.

Barry Ritholtz

Barry Ritholtz did his regular review of the employment numbers, with, as usual, a special focus on the birth/death adjustment.  The overall conclusion is that employment growth is overstated and the BLS methods are seriously flawed.

He also quotes at length from Alan Abelson, doing his monthly bearish take on the BLS report.

David Merkel

David Merkel undertakes his typical thoughtful analysis of the problem, well worth reading in the entirety.  David looks at the addition of jobs from the B/D adjustment and compares these to the net job change over time.  He graciously notes our dissent on some of the key issues.

Importance

The significance of these analyses is demonstrated by Art Cashin's citation.  The notion that the BLS methodology is wrong has become accepted as conventional wisdom.  Nearly everyone thinks that these are "phantom jobs", added by a flawed methodology, and that "turning points" in  the market are missed.

It is not part of the job description for BLS employees to write on blogs or to appear on CNBC.  As a result, there is no spokesman for their method.  It is a one-sided debate.

All of the sources cited in this article have significant power.  Their arguments have influenced active traders to believe that economic data have been artificially inflated.

Our Approach

After many months of attempting to refute specific claims about the BLS approach, we have decided to take a different tack.  More to come....