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Statistical Color

Statistical Color

Courtesy of Michael Panzner at Financial Armageddon 

Eye with rainbow

Although I’m not an economist, I spend a lot of time trying to figure out which way the economic winds are blowing. For a country as large, diverse, and globally connected as the United States, it can be quite challenging deciding which trends and data points are relevant at any given point in time, and which are extraneous, untimely, incomplete, or misleading. It doesn’t help, of course, that many so-called experts in Washington and on Wall Street (along with their enablers in the media) are happy to dissemble and distort instead of presenting the pertinent numbers along with a straightforward interpretation of what they mean. But even when the data is unencumbered by spin, it helps to understand its shortcomings and limitations. Below are four reports that provide some additional color on the statistics that many analysts are keying in on nowadays.

"Economic Data Can Be Misleading" (Financial Times)

High angle view of a teacup on a newspaper

Headline-grabbing data releases might be painting a rosy picture of the US economy at the moment – but it would be wise to keep an eye on what other, less-scrutinised surveys are showing, says Rob Carnell, chief international economist at ING.

For example, the Institute for Supply Management’s manufacturing index still works as a bellwether for the US economy – but only for a section of it, he says. “Nearly half of US private sector employees work for small firms of 50 people or less, or are self-employed – and you can bet that most national surveys save time and effort by sampling mainly large companies.”

“Right now, the ISM index is consistent with GDP growth rates of about 4.5 per cent. The headline survey from the National Federation of Independent Businesses, whose members typically have less than 50 workers, is consistent with a contraction of about 1 per cent.”

Neither is actually “wrong”, Mr Carnell says. “We just have to be aware that they are describing different parts of the US economy, and that the aggregate picture is somewhere in between.”

Relying too heavily on one survey carries risks, he said. “Strategists who assumed the rise in the ISM in 2002 and 2003 would result in a surge in Treasury yields to 8 per cent got it badly wrong,” he notes. “Size really does seem to matter when using data to forecast economic growth or market variables.”

"Credit Card Users: Not So Responsible After All?" (Associated Press)

With unemployment high and personal wealth diminished, how was it that strapped consumers were paying down their credit card debt last year? It turns out they probably weren’t.

The bulk of 2009′s drop in credit card debt instead came because banks were forced to write off loans consumers failed to pay, according to an analysis of Federal Reserve data.

Loans are typically charged off by banks once they’re 180 days past due, under the assumption that the debt won’t be repaid.

In 2009, banks wrote off a record $83.27 billion in credit card debt. A study by consumer credit research site CardHub.com found that accounts for the bulk of the of $93.2 billion drop in consumer card balances reported by the Fed for last year.

"If you just look at the numbers, you think, ‘Oh my goodness, there was a big decrease in credit card debt,’" said Odysseas Papadimitriou, CEO and founder of CardHub.com.

But Papadimitriou said it didn’t add up that consumers could make such a big dent in debt while under the financial pressure Americans faced last year.

"Trading Away Productivity" (New York Times Op-Ed by Alan Tonelson and Kevin L. Kearns)

FOR a quarter-century, American economic policy has assumed that the keys to durable national prosperity are deregulation, free trade and a swift transition to a post-industrial, services-dominated future.

Such policies, advocates say, drive innovation, which leads to enormous labor productivity and wage gains — more than enough, supposedly, to make up for the labor disruptions that accompany free trade and de-industrialization.

In reality, though, wage gains for the average worker have lagged behind productivity since the early 1980s, a situation that free-traders usually attribute to workers failing to retrain themselves after seeing their jobs outsourced.

But what if wages lag because productivity itself is being grossly overstated, especially in the nation’s manufacturing sector? Then, suddenly, a cornerstone of American economic policy would begin to crumble.

Productivity measures how many worker hours are needed for a given unit of output during a given time period; when hours fall relative to output, labor productivity increases. In 2009, the data show, Americans needed 40 percent fewer hours to produce the same unit of output as in 1980.

But there’s a problem: labor productivity figures, which are calculated by the Labor Department, count only worker hours in America, even though American-owned factories and labs have been steadily transplanted overseas, and foreign workers have contributed significantly to the final products counted in productivity measures.

The result is an apparent drop in the number of worker hours required to produce goods — and thus increased productivity. But actually, the total number of worker hours does not necessarily change.

This oversight is no secret: as Labor Department officials acknowledged at a 2004 conference, their statistical methods deem any reduction in the work that goes into creating a specific unit of output, whatever the cause, to be a productivity gain.

This continuing mismeasurement leads economists and all those who rely on them to assume that recorded productivity gains always signify greater efficiency, rather than simple offshoring-generated cost cuts — leaving the rest of us scratching our heads over stagnating wages.

Basset hound in sunglasses and pink cap

"What’s Gross About Our Gross Domestic Product?" (RealClearMarkets)

Our deficit for 2009 was over 10% of GDP. Or was it? It soars to 18% of GDP, if we add in off-balance-sheet spending (legal for government, illegal for Enron), incremental debts for Fannie, Freddie and the other GSEs (backed by full faith and credit of the US Treasury, with no limit to the obligation, but somehow not considered part of our deficit or our debt), and new unfunded liabilities for Social Security and Medicare. Just to supply a frame of reference, this is twice Greece’s deficit.

Our public debt is 40% of GDP according to the CIA 2009 World Factbook, down from 60% in 2007. Right? Well, they took the off-balance-sheet debt off the tally; apples-to-apples, we’re at 85%, and rising fast. Add in the GSEs, plus state and local debt, and we’re at 140% of GDP. Greece is at 115% of GDP. Add in the unfunded Social Security and Medicare obligations, and we’re at 420% of GDP. Who has greasier accounting? Sadly, the US.  


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