Warping Economic Data For Fun And Profit

When the Case-Schiller monthly data on housing is issued, economic analysts pour over the information city-by-city to look for signs of a housing recovery. The data for February did not show a rebound in prices. Home values in the ten largest American cities were down 2.1% from the previous month and off 18.8% compared to February of last year. The first sign of optimism, a knee-jerk sentiment that was entirely predictable, was that the rate at which housing prices fell slowed from the 2.6% drop in January. But, averages mean very little when looking at miserable numbers which are likely to continue to hurt consumers and the mortgage part of the financial industry. In Las Vegas, home values have dropped 31.7% over the last year. Housing prices may not have dropped as much in Battle Creek, but the housing market is still being destroyed from coast-to-coast.

Another group of analysts looked at the one month trend and said that it was meaningless. The fact that the patient lost a finger instead of a foot may matter in terms of size but does nothing to help arrest a decline in dexterity. There are no such concepts as numbers that are “less bad”, “less worse”, or “mortal but not fatal wounds.”

When looking at important economic data, analysts and journalists disagree with one another for several reasons. The first one is the most intellectually honest. Some experts interpret information based on a context that views the overall economy as still being in free fall. Others see the oddly named “green sprouts” growing in a barren field. One group may view housing as part of a broader picture which includes employment, factory output, and consumer sentiment. Another may see home purchasing and mortgage activity as discrete signals of the health of the housing market.

Another reason for data interpretation ending up as a fight between mainstream and contrarian factions is that extreme opinion draws attention. It sells newspapers and brings in clients for Wall St. research houses. It allows people who could not make a living as day laborers, policemen, school teachers, scientists, or doctors to have an employment niche where they can make money. This niche is usually inhabited by the contrarian. He is a counter-puncher by nature and, therefore, does not need to do much of the initial analysis of complex data. His role in the interpretation of economic information is simply to say that the most well regarded experts are wrong. The mainstream experts may be wrong because they are jaded or are too slow-witted to catch the nuances of the numbers. But, accusing experts of being wrong is an age old way for getting attention and making money. T Boone Pickens has created a cottage industry by making contrarian attacks on widely held assumptions about alternative energy prospects and oil prices. From time-to-time, he has lost money in these endeavors. But, it has also made him much more famous than the Secretary of Energy.  Since Pickens is a billionaire, his claims that he knows more than all of the other energy experts combined may be partially true.

The most legitimate argument over important economic data that came out recently is whether or not big banks need more capital. The government believes that it has found the most accurate answer possible by applying its “stress tests”. A number of bank analysts and most bank managements say that the government actually knows almost nothing about banking so the results of the testing are useless. One research house recently said Bank of America (BAC) needed as much as $70 billion to measure up to government standards. The CEO of B of A has hinted he does not need a dime and actually plans to pay back the TARP money he has already taken as soon as he has a free moment. Since the management of B of A cannot predict the thousands of things that will affect its earnings and balance sheet, the government is in no position to know either. Unfortunately, the only way for the bank and any other interested party to be certain about its need for capital is to wait the day to come when B of A finds that it is no longer viable. The government is not willing to wait for that day. Its opinion is “right” because it is the government and it will tell B of A what it will have to do to have adequate capital. Whether the “stress test” results are a meaningful guide really does not matter.

When epistemology meets the discipline of economics, the limits of knowledge always win. Being a contrarian does not mean much when the other side is shooting blanks.