The incumbent president's political party has a vested interest in presenting a happy face to the voters, especially during an election year. It has several tools it can use to enhance the appearance it presents. One, of course, is the Federal Reserve. When the central bank buys Treasury bonds, it lowers interest rates and floods the economy with dollars to stimulate the economy.
As investors, we have a duty to ourselves to form a valid opinion about the economy -- one based on reality, rather than the subtle things that politicians and trade groups do to manage the news.
What do I mean by news management? Consider this example from the National Association of Realtors. Granted, the NAR is not a government agency. But this example of data manipulation will serve as a model before we address direct government manipulation later in the post.
The NAR admitted that it had erred in reporting sales of existing homes, and it revised its figures all the way back to January 2007. This chart plots the year-over-year growth in sales, along with the change in the average price of a house.
The change in price was reported correctly, but the number of houses changing hands was dramatically higher in the initial reports. This was more than a casual error. On average, sales were reported 13% higher than they actually were. At one point in 2010, sales were reported to be down 35% from their high, when in fact they had fallen by half.
Clearly, it is in the best interest of the NAR to conceal the depth of the slowdown in sales from prospective buyers, who might delay a purchase because they see even lower prices ahead. It also scares off sellers, who realize they are likely to have difficulty finding a buyer.
But the practice of revising data is not limited to private organizations. We have been told that the national unemployment rate has been understated at 8.6%, because several hundred thousand unemployed people were removed from the labor pool. This is difficult to check, but here's an example that can be easily documented.
On December 8, the Department of Labor released the following note with its weekly employment data report (with emphasis added): "In the week ending December 3, the advance figure for seasonally adjusted initial claims was 381,000, a decrease of 23,000 from the previous week's revised figure of 404,000."
In the report from the previous week, the department had reported a seasonally adjusted total (a great source of data manipulation in itself) of 402,000 initial claims. That figure was revised higher to 404,000 -- a change of merely 0.5%. However, the report focuses the reader's attention on the 23,000-claim decrease, so there is an improvement of 8.7% in the number on which the public is asked to focus.
This would still not be a big deal if it were an occasional error made randomly, but it is not. It is a systematic error that has occurred in the same direction in 56 of the past 58 reports. The revision increased the number of newly unemployed by an average of 3,286 each week. The weekly figure was off on average by an amazing 57%.
The peaks in reported average change in initial jobless claims (solid blue line) represent a decrease in claims. Notice how the reports exaggerate the reduction in unemployed compared to the revised figures released each week.
Notice in particular how the data in May and June show unemployment to be decreasing while in fact the rate was increasing. This is not a unique government error. I have recorded similar errors in many economic indicators, and virtually all of them paint a rosier picture than reality can support.
Here's another example: the quarterly corporate profits reported by the Bureau of Economic Analysis. The blue dots represent the initial data, and the blue line represents the data after revision. Only one revision was higher in the last four years.
Here's one that is no surprise. Sixteen of the past 20 monthly reports of year-over-year changes in the Federal Housing Finance Agency's Home Price Index were revised lower. The index represents the activities of Fannie Mae and Freddie Mac.
Stock traders can profit from the rosy picture painted in an election year. But they must be prepared for the truth when it emerges, and they must resist the urge to be blinded by the promise of hope and change.
— Fred Goodman, a registered investment adviser and Certified Financial Planner, publishes MarketMonograph, a daily, Web-based subscription service specializing in technical stock market analysis and the application of economic indicators to market timing. You can reach him at fred@marketmonograph.com.
Automated trading is on the rise. Using numbers like these as inputs, trades are made automatically with no thought to whether the numbers are right. This is a cautionary tale.
The Census Bureau projects the US population will be 312,780,968 on New Year's Day -- an increase of 2,250,129 or 0.7% from a year ago and 1.3% more than the total population on Census Day, April 1, 2010.
In January 2012, one birth is expected to occur every eight seconds in the United States and one death every 12 seconds.
Meanwhile, net international migration is expected to add one person to the U.S. population every 46 seconds in January 2012.
The combination of births, deaths and net international migration results in an increase in the total US population of one person every 17 seconds.
I continue to believe that demographics and population will be the number one driving factor in the economy. Think about it: Japan and Europe are perpetually sluggish because of rising debts and a dwindling and aging population.
So far, the U.S. has fended off some of these problems but our population is now aging so we are falling into the same trap -- fewer younger people to support a rising aging class.
There would be no social security problem without the baby boomers. If there were more young people rising up in the working class, it wouldn't matter.
So really the question is can the U.S. find a way to continue population growth, either through immigration or births. Population growth has driven the ecomomy for 100 years or more.
Thank you Fred for helping us read between the lines. This has really opened my eyes. I will think twice when reading a report the next time and taking what is said at face value.
I think it is always a good idea to be skeptical of any data from the government or special interest goups. It is amazing how data can be manipulated to bolster a governmental agency or special interest groups agenda.
I appreciate your comment, thank you Phoenix. It is my cherished hope to have an effect on the acceptance or rejection of misinformation. There is another dimension too.
A source of information currently misleading the public is the use of comedy and glib writing to conceal the fact that there is no substance to the message.
We can all call to mind a "comic" or a funny writer who makes us laugh while destroying someone or something he does not like without offering a single word of evidence.
They can be recognized easily since their message is always amusing and destructive and is never supportive. It is simply sarcasm or ridicule and I leave it to you to come up with the perpetrators of this form of character assassination.
I give Saturday Night Live a pass for using comedy since that is their avowed purpose and they apply it in a reasonably evenhanded way. But I do not give a pass to those with obvious agendas that they attempt to hide from those they are trying to influence using glib attempts at humor.
The data is always manipulated but it always comes out in the wash. I think it's more important to watch private data. One thing I've seen lately is that for the first time in many quarters, there were more downside earnings revisions than upside earnings revisions. For that reason I think how the stock market acts in 1Q 2012 will be a big harbinger of the rest of the year. Everybody always gets giddy during an upside earnings cycle but they forget how painful and lengthy it can be on the downside.
That being said, can these coporations please do something constructive with all those profits!
You're right Scott, phony data does get corrected from time to time. However, the revisions are done at least annually and are not limited to just one year back. The data I presented was revised back 5 years and I guarantee that it will be revised again.
Unfortunately, the damage is done in the present and the data is corrected afterwards. If lies affect the election it will not change things to have the truth come out a year after it's outcome is history.
Let's all agree to call a lie a lie and not use the silly excuse that "it's just politics." That's no different from calling a thief a needy person and giving him a house and a car that you pay for for the rest of your life.
Don't get me wrong, I agree with you. The government statistics have major flaws, the greatest of which is the "Birth/Death Model" in the employment statistics which basically add or subtract 100s of thousands of jobs based on misinformed conjecture.
We would probably be better off if the government just eliminated the data, now that I think of it. Wouldn't the market be healthier if it just relied on private data rather than government-manipulated statistics?
I think one of the big problems over the last 20 years is the government thinking that they can control every aspect of the economy. There are a buch of academics watching screens always overreacting to their own data. Think of Greenspan and 2002 and the housing bubble. It's like trying to oversteer a Ferrari -- if you don't known what you are doing you crash the car.
I know we agree philosophically Scott, but I would prefer more rather than less information. I would not be happy if the data were withheld as you suggested. I am able to make some sense of it and would only have the words of politicians if they did not give me some numbers which I can check with some effort and understand with some thought.
I just looked up last week's report from the DOL and found the following:
"In the week ending December 17, the advance figure for seasonally adjusted initial claims was 364,000, a decrease of 4,000 from the previous week's revised figure of 368,000."
However, this week they revised the 364,000 to 366,000 so instead of the decrease of 4,000 initial jobless there was a decrease of just 2,000, so it was half as good as they reported.
This week they reported an increase of 15,000 new jobless and I will gladly book a bet that it will turn out to be more than that after next week's revision.
Noreen, is that because we can expect a government agency to massage the data? Or because they are not capable of collecting all the right data? Or both?
I found the level of competency among government workers ranged from exceptionally high to abysmally low. The high performing workers often went out of their way to correct errors and omissions in data provided by some of the less committed workers. But when you consider the amount of data being gathered -- and the fact that it is often gathered by one person, working without much oversight -- you can see the potential issues.
If one person, working alone for as low as $12 or $13 an hour -- intentionally or inadvertently -- surveys the wrong household, enters data incorrectly, fails to explain a question correctly or misunderstands the question she is asking -- then the results could be compromised.
Yes, there are certain quality checks in place. But they don't catch every error, or every lie.
I guess I didn't make my point clear Street Smart. The error is nominally very small as you point out and as I wrote in my post, but the announcement emphasized the change between weeks not the total amount. The improvement lastweekwas originally given as 4000 and then revised to half that amount when nobody was looking.
They announced twice the improvement that actually occurred and they have done that in 56 out of the last 58 weekly reports!
To me that is a significant fabrication that is probably designed to mislead.
Oh, no @Fred, I totally got your point and I thought it was really an interesting illustration of the "make news with the numbers now, revise them later" phenomenon.
I was making the additional point that the DOL's numbers were suspect to begin with. When you're dealing with an original number that is 1% of the total and then revise it to .5%, I'm just questioning the statistical accuracy of the original 4,000 number.
In other words, the DOL is saying that not only does it know exactly where the needle in the haystack is; it then knows when it becomes half a needle.
Impressive if true, but I'm dining at @Noreen's salt lick!
Oh, sorry I misunderstood your point Street Smart.
I certainly understand the difficulties in sampling data, but there is no way to make an error in the same direction 56 out of 58 times if you are honest. An honest data collector would at the very least subtract the average systematic error from the data and present that as his/her estimate. Simply doing that would present a number much closer to the final revised figure.
You are ABSOLUTELY right, @Fred! 56 out of 58 is NOT an aberration! They didn't know that they were dealing with the Data Whisperer when it came to YOU looking at the numbers, that's for sure.
Final score: Fred 1; DOL 0
I say this early and often but it bears repeating: We are SO LUCKY to have access to your insights!
Not only does no one take responsibility, but they have grown to expect it. Here is a note I received in response to my post from a very long time friend and associate of mine. I am very fond of him but I am not pleased with the "ah shucks" attitude of which this is an example:
"We commodity traders have been dealing with this since I was in the business in 1965. One year I lost well over 50k on a supply demand government report which was way off the mark. One firm, who had to report their grain supplies on hand, had the normal person on vacation and a secretary filled out the report to the government for their data and she missed about half of the locations she needed to include. It was an honest mistake. The next month the report was still not corrected. It took about 3-4 months before they figured out the 'accounting error' made by a secretary for one firm.
"On crop condition reports, many county agents put in their numbers and they can say anything they want. They are closing that loop.
"I personally try not to dwell on reporting errors or manipulation of data. Hell, corporations have been doing it for years."
I can accept that honest mistakes are occasionally made, but making the same mistake 56 out of 58 reports cannot be accepted. In my view it is an attempt to mislead the nation in order to enhance chances for reelection. I know the excuse is "everyone does it," but I will reject it whenever I see it and will try to expose it to potential voters whenever possible.
Guess I just don't understand how they get away with it. They have a 3blast yr long grand jury for a baseball player saying one lie in front of congress but lying to citizens is overlooked. Frustrating.
It is frustrating. i can't speak for a public company, but I can tell you in terms of government data that it is difficult to watch what you know is subtle or not-so-subtle manipulation of the facts and have little or no recourse, in spite of whistleblower programs.
Maybe there's some hope yet -- assuming someone in a company/agency wants to take responsibility. Consider this prediction:
The increased reach of U.S. whistleblower laws and a growing interest overseas in whistleblower programs will make 2012 the Year of the Whistleblower, predicts Phillips & Cohen LLP, a law firm that has specialized in representing whistleblowers for nearly 25 years.
A harbinger of the year to come can be seen in the flood of whistleblower submissions the Securities and Exchange Commission received in the first seven weeks after it adopted the final rules for its new program whistleblower reward program created by the Dodd-Frank Act. From August 12 to Sept. 30, the SEC received 334 whistleblower submissions.
As a result of Dodd-Frank, the U.S. now has four whistleblower programs that offer substantial rewards to private citizens who expose fraud against the government, investor fraud and foreign bribery by corporations: The SEC's and the Commodity Futures Trading Commission's programs created by Dodd-Frank; the Internal Revenue Service's whistleblower reward program for claims exceeding $2 million; and one for Medicare fraud, defense contractor fraud and other types of fraud through the "qui tam" (whistleblower) provisions of the False Claims Act.
Statistics have been spun since the age of cave paintings, but I think what's really scary is the role of the mainstream media in giving credibility to invented data.
Somehow the newsworthy version gets reported and neither the corrections nor the opposing points of view ever make it into the sound bite do they?
News is reported too often - daily or even hourly. This causes an over-emphasis on the data that was just released. Monthly unemployment numbers, minute-by-minute stock index changes, consumer confidence, retail sales, whatever - is mostly noise in the best of cases.
Knowing that much of the just-released data isn't quite right just makes it more important to base investment decisions (and voting decisions) on more than what's in the news.
The reporting about unemployment is an example - most stories recently seem to be about how the unemployment rate declined by 0.1% or new jobless claims are up (or down) slightly. I don't hear much perspective about the reality that the unemployment rate remains high and the recent changes are small.
Another way that the media exacerbate the problem of reporting statistics is in trying to explain why the markets performed as they did on a given day. Some talking head will inform us that the Dow is down because "the market was looking for" X and it got Y instead.
But efficient market theory would suggest that those expectations and even the statistics upon which they are based would already be reflected in the market, if not 100%, then certainly a great deal.
So, it's like a hall of mirrors--the media explains how statistics moved the markets and the media explanations themselved become factors in market movement. Chicken, meet egg!
Exactly right. One of my frustrations with "financial journalism" is that most financial journalists have never traded or even invested and really don't know much. They often fall back on easy assumptions and "spurious correlations" that are easy to make with little statistical proof.
I.E. "Today the market sold off for XYZ." The bottom line is that you can never prove much of anything unless you have a large statistical database from which to test. On any given day the market action is what it is because millions of buyers were being matched with millions of sellers. Making an assumption about what each and every one of them was thinking -- or even what the "majority" of them were thinking -- is somewhat absurd! Maybe a bunch of them just had to sell or buy!
EXACTLY, @Scott! Or in this day and age of high-frequency program trading and increased market volatility , maybe the computers just had to sell or buy! Financial journalism really reached its point of total absurdity when it tried to explain the Flash Crash!
Yes, thanks Fred. I hearby vote this the #1 discussion thread on IU in 2011.
While we're at it, let's not just blame government officials. Let's talk sell-side analysts. I would guess if you are a data cruncher it might be better to take the other side of their recommendations on a trade, especially given that at any time they rate less than 5% of stocks a sell.
In fact, after the whole 2000 bubble implosion/Sarbanes Oxley/Regulation FD nonsense, it appears that things have gotten worse... earnings projections and results have gotten MORE volatile, due to the poor forecasting ability of sell-side analysts and "Chief Strategists."
I wrote about it here, take a look at the charts and the data. Earnings estimates/market reactions have become more extreme peak/trough:
After looking at that chart, it should give you doubt when the top sell-side strategists claim that S&P earnings of $100 per share can be maintained throughout 2012.
You nailed it Scott, the earnings estimates for the S&P 500 are off more than any data offered for our consumption. This is the reason I became a technical analyst rather than a fundamental analyst.
At least we can depend on the Wall Street Journal to provide accurate volume, advances and declines, highs and lows etc. The earnings are revised by a bigger factor than anything I look at.
This is the reason I became a technical analyst rather than a fundamental analyst.
@Fred, thanks for the post. To be frank I had believed more in fundamental analysis rather than technical analysis. But after reading your article I am forced to change my opinion.
Companies do revise numbers. They call them "restated earnings."
In June 2010 the headline of a news item was: "Dell to restate earnings due to accounting fraud."
That's just the most obvious situation. A couple of months ago there was an article headed -- "Traders Dump Office Depot for Restated Earnings" -- Forbes.com.
I know there have always been schemers and liars in business and government. But it sure seems like that type of behavior has become more acceptable than it used to be.
Lying and cheating used to be something done more discreetly. Now the liars and schemers brag about their exploits. Remember the arrogance of the most recent ex-Ill governor to go to jail?
This information in support of my post came from today's economic report:
The US Census Bureau reported minor changes in private residential and nonresidential construction, the former moved up and the later turned lower. Public construction has been falling at around an 8% annual rate since June with total constructionflat at 0.14% annual rate.
What makes the news for me though is their style of reporting an example of which appears below.
"The U.S. Census Bureau of the Department of Commerce announced today that construction spending during November 2011 was estimated at a seasonally adjusted annual rate of $807.1 billion, 1.2 percent (±1.6%)* above the revised [emphais added] October estimate of $797.4 billion
.* 90% confidence interval includes zero. The U.S. Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different from zero. 798.5 was released on December 1st."
The revision of the November data in December was a tiny amount -- just 0.15% -- but that tiny revision represents 14% of the reported "improvement." Even so, what I like the most is the footnote that specifies there was no change at all, but which will not stop the media from quoting the positve change and omitting the fact that there was really difference.
Within that context, the reporting of an increase is dishonest. They should report that "construction spending is unchanged" or that "changes in construction spending are not statistically significant".
It's made worse by the fact that many reporters can't or don't see the problem.
Last week the Department of Labor "reported an increase of 15,000 new jobless and I will gladly book a bet that it will turn out to be more than that after next week's revision."
The DOL revised the number of initial jobless for December 24 was actually 387 thousand instead of the 381 thousand they reported a week ago. Consequently, the increase in jobless turned out to be 23 thousand last week instead of the 15 thousand they reported.
Any guesses about how the revise the improvement of 15 thousand they reported for December 31?
Fred, you have probably answered this. But this comment thread is long and I have forgotten. But what I want to know is this: have the DOL numbers always been this fluid, or is it a problem that seems to be related to this particular administration?
My impression is that it is currently at its worst because the employment numbers are so lousy and have been getting worse. As we get closer to the election the revisions are getting even larger and will continue in that direction in my opinion.
However, I only started to record the old and the new values each week a year ago when I noticed that the revisions were almost always in the same direction, so I cannot provide the data back more than a year.
I'll try to uncover some older data to see if the problem has been getting worse as I suspect.
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Voters feel more favorable about an incumbent president when the economy is good. So expect the Obama administration to do everything possible to push up the market.
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