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.)

Comments

[oldprof]

Black - Let me begin by saying that I value your continuing contributions to comments. I am not trying to generate a "boo-yah" nation here.

With regard to Malpass, who will not be continuing with the "new" Bear, I have a sharply different conclusion. I renew my continuing invitation to call for a conversation on this subject, since I cannot take the time to fight it out in the comments. I replied to your listed email address, so please call.

The portrayal of the Malpass record has been seriously distorted in the blogosphere. I have read his reports every week for years. He has effectively called many concepts and many market turns.

It is unfair to take, out of context, old quotes without citing developments. We should expect economists to change views with new data. Malpass has done that, unlike many others who stick to a perma-bear or perma-bull orientation. Change in opinion is OK, and desired.

Thanks again for your participation, and I hope to talk soon.

Jeff

[blackvegetable]

"Doh! That was Black Vegetable I was calling on!
Dear Dave, blush, no aspersions to you :)"

No worries, Carol....it is clear that your confusion is not limited to the sources of posts.....

When even the perpetually deluded David Malpass admits that the US has been in a "recession like" state since 2006, it's well past time to accept that this is an economy in deep doo-doo.....

[AG]

The first two presented both had clear manipulation pf the data, this could be used to discern what they felt most needed to be massaged to make the point.

The more neutral presentation of data was made by the party that offered no concrete guidance and had no axe to grind.

[carol]

Doh! That was Black Vegetable I was calling on!
Dear Dave, blush, no aspersions to you :)

[Carol]

Dave,
What, did the data not confirm your prejudices so you have to grouse?
No matter how much you deflect and contort the information, it defies those (you?) who so gleefully pronounced us Dead in a recession we didn't yet recognize way back last fall. That was, uhhh, lets see, how many quarters ago?

The doomsayers were wrong and continue to be wrong, are you big enough to admit it?

Let's give some credit to the companies across the nation that have suffered the same info-blizzard we have, and have adjusted as intelligently and compassionately as they know how.

I toast them every one, congratulate them and hope for their every success.

And to the doom and gloomers: Pptthhhhhhh!

[Mark]

Alisa,

Be careful, there are many "experts" out there. You must read their interpretations with a grain of salt. You never know what motivates them torturing the data to find something in line with their agenda. I bet that Barry Ritholt is biting his nails now and sitting in the house of pain after his wrong sided call to "go crazy short" in March of this year.

You must develop independent thinking. Good traders and investors tend to be independent thinkers. They are not influenced by what their neighbors say, what some guru says on television, or even something that might distract them from their method of trading. Instead, top professionals will have a method that generates low-risk ideas, manages the trade to cut losses short and let profits run, and have a position-sizing algorithm to help them meet their objectives. What someone else says about the market or their positions will not influence them at all.

Good luck!

[Alisa]

Data interpretation is not an easy task. The challenges include, no doubt, the challenges of accuracy and validity of the data. But yet the biggest challenge may be in how the data is interperted and how the interpretations are used to make critical decisions. As I continue on my journey into the stock martket I am feeling almost "overwhelmed" by all the data. But, I think the goal is to shift through it and determine which data is critical in helping me to reach my investment goals.

[blackvegetable]

"it "feels" like a recession. I wonder where that feeling comes from? Mass media, maybe?"

Get out of that gated community much?

[Dave]

I think it is a matter of being able to interpret the data objectively without bias. David Rosenberg always finds something to “strip” from GDP to paint a gloomy picture (strip defense spending, strip inventories, strip exports, strip consumer spending, strip business investment…) If the stripping does not work to produce the gloomy picture, he injects government conspiracy theories about the government underreporting the inflation.

Barry Ritholtz is an opinionated and self-deceiving perma-bear lawyer pretending to be an economist with extremely poor predictive record. He has been predicting recessions and “secular bear markets” since 2003. He is consistently wrong. Can you name at least one of his predictions when he was right? Dow 6800 in 2006? Multiple recessions in 2007? And now “positive GDP” recession in 2008?

Briefing economists have been the most objective and accurate.

I do not know Gary Smith and cannot comment.

[Tim]

Not to worry if we are in a recession, Yesterday I heard a financial commentator state that even if the economy was still in positive growth, it "feels" like a recession. I wonder where that feeling comes from? Mass media, maybe?