Official Stats Are Very Promising but Are They True?
I have arrived at the conviction that the neglect by economists to discuss seriously what are really the crucial problems of our time is due to a certain timidity about soiling their hands by going from purely scientific questions into value questions. – Friedrich August von Hayek
The masses are all too willing to accept official statistics, press releases and political promises at face value. They should know better. But, it appears that they don´t want to bother. Most investors are determined to be convinced that the worst is over. Consequently, general financial markets in 2009 can be expected to end on a positive note. And, it is conceivable that 2010 will kick off with financial markets ringing in the New Year positively as well.
A number of headline indicators are looking quite positive. Or, at least, they are not as bad as expected. As has become standard procedure by now, the markets do not require ‘good news´, but only ‘less bad news´, to keep up the high spirits.
For instance, the US employment figures published at the end of last week came in far better than economists had forecasted. They were still pretty dismal, but good enough to boost stockmarkets and, more surprisingly, to give the Greenback a shot in the arm. The USD/CHF had fallen to a low of 0.9958 last week. But it recovered and, as I write this Update, stands at 1.0186.
Another not-so-bad glimmer of hope: Consumer credit in the US declined less than forecast in October. Yes, these days, credit and debt keep the wheel turning. That piece of information was gladly interpreted as a sign that the financial crisis is easing and households are gaining confidence that the economic expansion will take hold.
So, have we emerged from the recession? Will 2010 be the beginning of the next big bull market? European investors appear to believe so. Their confidence level rose to an 18-month high in December. Similar confidence was discovered in Asia. Not so much in America. Possibly, they see some issues in their daily lives that investors elsewhere don´t.
In particular, I believe Americans are (finally) starting to question the validity of government statistics. While at first sight, the official unemployment rates are ‘much better than expected´, the level of unemployment in America is MUCH WORSE and that is becoming visible for all to see.
The following chart, courtesy of www.chartoftheday.com, depicts the US development of US non-farm payrolls. It puts the US unemployment figures reported at the end of last week into perspective by comparing job losses during the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-2006 (dashed blue line).
As the chart illustrates, the current job market has suffered losses that are more than triple that of what occurs at the lows of the average recession/job loss cycle.
True, unemployment in America is very different from the official numbers reported. The charts published on John Williams´ site at www.shadowstats.com are probably much closer to reality and much more in sync with what Americans see in everyday life.
Irrespective of our doubts, the market is willing to accept official statistics as their point of reference. As long as that is the case, we may see a bear market rally further extended.
And, governments will certainly continue to do whatever it takes, no matter what it costs. I´m pretty sure 2010 will start off with that familiar sound of HARD PUMPING.
Japan just released a stimulus package at the first signs of renewed ‘recovery weakness´; the Japanese government unveiled a 7.2 trillion yen ($81 billion) economic stimulus package. After all Prime Minister Yukio Hatoyama´s popularity was waning. Now, we can´t have that. According to Mr. Bernanke, the Federal Open Market Committee will probably maintain its stance for a long period of low interest rates next week as tight credit and high unemployment weigh on the economy. Fed officials meet for the last time this year Dec. 15-16.
According to the Bank for International Settlements (BIS), China´s lending boom may erode the quality of bank balance sheets as a jump in lending was ‘unavoidably´ linked to an easing of credit standards. The BIS said that "while strong loan growth in China has fueled the current economic recovery, it is not without risks."
So, the credit expansion "raised concerns about excessively loose credit conditions" with the BIS? Hmmm, what a surprise!?!? If anything is for certain as we head into 2010, it is that you can count on more loose monetary policies. This may well extend the momentary up-trend in financial markets.
How long and how far? Nobody knows. But, I expect 2010 to be a VERY interesting year...
This editorial originally appeared in the Mountain Vision newsletter and is provided courtesy of BFI Capital Group.
Posted by The Walking Man on 12/13/09 11:19 PM
My father once told me that "the purpose of government statistics (or even statistics in general) is to give credence to the claims that the user of the statistics is making. This is especially true when it come to politicians and their manipulative use of "official statistics."
I enjoyed reading today's article by Frank Suess and was reminded of similar warnings my economics professors instilled in me many moons ago about the unreliability of so-called "official unemployment statistics."
The unemployment rate may be one of the most misunderstood economic indices. The unemployment rate is not a measure of the percentage of people that do not have a job. It is a measure of the percentage of the labor force that doesn't have a job but are actively looking for work.
So, if the unemployment rate is quoted as 5 percent, it does not mean that 95 out of every 100 people are working. It could mean, for example, that out of every 100 people, 60 are working, 35 are not working and don't want to be working, and 5 are not working but are actively looking for employment. That's the key; someone must be actively looking for work to be listed as unemployed in the index.
The unemployment rate cannot be completely accurate and there are plenty of reasons for this. Take unemployment insurance for example. Unemployment insurance was set up as a safety net to provide protection for people that lose their jobs and fall on hard times. One of the conditions of receiving benefits from unemployment insurance is that you must be actively looking for a job. People may become lazy and dependant on the benefits and this may induce some people to stay unemployed but pretend that they are looking for a job. These people would, incorrectly, be included in the unemployment rate statistics, which would inflate the rate.
On the other hand, some people are unemployed, are not actively looking for work, but would accept a job would one become available. This may happen if they had been actively looking for work but were unsuccessful; this could discourage them and cause them to voluntarily withdraw from the labor force.
The unemployment rate does not measure the amount of people that are "underemployed." Let's say someone works a part time job that offers 15 hours of work per week but this person needs a full time job in order to make ends meet. Let's say he or she is working this part time job only because it is the only work they could find. This person would be considered "employed" yet they really are "underemployed." So, the unemployment rate cannot be an exact measure of the employed work force in the economy.
The unemployment rate will never be an exact measure but it is still a useful index. The most useful aspect of the index is that it shows the general direction of the unemployment rate. Comparing it over months or years can show the general employment trend and can show the direction of changes in unemployment. That is what the unemployment rate should be used to show. You cannot use any single month of statistics on its own.
Reply from The Daily Bell
Good points, thanks.
Posted by David Kress on 12/12/09 10:27 AM
There is a seminal book written about government statistics at least 40 years ago noted below. My first Harvard educated-boss who ran with JFK at Harvard had me read it when I started my first job out of college working for him as an industrial market analyst.
I recommend it today to all your readers as it uncovers how the government estimates, calculates, and fabricates numbers. For instance, I fully expect a seasonal adjustment or index revision to be the explanation for the large drop in job losses last month that tilted the markets away from gold, rose the dollar, propped up the stock market and future revisions will completely invalidate the reported numbers.
The seminal book is called "On Economic Observations and Accuracy of Numbers" by Oscar Morganstern.
Must reading for anyone listening to the mass media bandy around government "offerings" of statistics they blithely accept a
Reply from The Daily Bell
Thanks for the recommendation.
Posted by Robert Brough on 12/12/09 12:47 AM
I like Ron Paul and his political philosophy in general. However, we did not start this war and when we have killed sufficient AlQuaida and damaged those who harbor them we will come home with a victory. The libs problem is they cannot define a victory, so Paul doesn't trust them. Neither do I.
Reply from The Daily Bell
According to the BBC, Al Qaeda was a made-up entity, one that didn't exist, at least not initially.