Monday, November 9, 2009

Regarding This NY Times Piece

The blogsphere is all a twitter about an article in today's NY Times. People are saying the government's completely cooking the official data to such a degree that no data can be trusted. Except for the fact that that is a complete misreading of the article.

A widening gap between data and reality is distorting the government’s picture of the country’s economic health, overstating growth and productivity in ways that could affect the political debate on issues like trade, wages and job creation.

The shortcomings of the data-gathering system came through loud and clear here Friday and Saturday at a first-of-its-kind gathering of economists from academia and government determined to come up with a more accurate statistical picture.

The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country.

American workers lose their jobs when carburetors they once made are imported instead. The federal data notices the decline in employment but fails to revalue the carburetors or even pinpoint that they are foreign-made. Because it seems as if $100 carburetors are being produced but fewer workers are needed to do so, productivity falsely rises — in the national statistics.

“We don’t have the data collection structure to capture what is happening in a real time way, or what is being traded and how it is affecting workers,” said Susan Houseman, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., who has done pioneering research in the field. “We have no idea how to measure the occupations being offshored or what is being inshored.”

The statistical distortions can be significant. At worst, the gross domestic product would have risen at only a 3.3 percent annual rate in the third quarter instead of the 3.5 percent actually reported, according to some experts at the conference. The same gap applies to productivity. And the spread is growing as imports do.

At worst, the distortion would lower GDP from 3.5% to 3.3%. And that's the worst case scenario.

Let's repeat a key piece of information contained in the article: the worst effect would be a .2% drop in GDP.

And the reason for this problem is the way we count a single piece of data: imports.

So, the story is "US needs to rethink the way it counts imports in GDP data."

How this has been translated into "all government data is crap" is beyond me. Wait a minute -- no it's not. There are a lot of people who write about economics that don't know point one about economics. For example, they don't know there are actually two different employment surveys (just as an example). Or, they claim a 50% stock market rally is a bear market rally (ever read WD Gann or John Murphy?) So to hide this high level of stupidity they claim any data they don't understand is somehow flawed.

Or, these people are still wedded to the belief that the sky is falling (despite a rising stock market, expansionary ISM numbers .. you get the idea). So they have to somehow save face from overlooking the obvious trends of improvement in the data. As a result, any piece of data which isn't bearish is cooked, while any piece of data the is bearish is lauded.

Regardless in both cases you'll see these same people quote data from official government sources when it conforms to their opinions.

To recap

1.) The US is thinking about changing the way it counts imports in the GDP report.

2.) This does not mean there is a plot to fool the people of the United States. Unless of course you either don't know anything about government statistics or are so completely bearish that all of the positive data released in the last 6 months must be discredited. In which case, it's all a big lie from the man specifically targeted at you to make you look foolish.

You may now return to your regularly scheduled conspiracy theory....