How to Form a Long-Term Trading Outlook (Part 2)

11/18/2008 11:01 am EST


Timothy Morge


I spent several years working on a Bureau of Labor Statistics GNP (now called GDP) Revision Study headed by economist Dr. Victor Zarnowitz at the University of Chicago Graduate School of Economics.  Dr. Zarnowitz is still one of the world's leading scholars on business cycles, indicators, and forecast evaluations. The Bureau of Labor Statistics study examined the link between a specific GNP number and the revisions released subsequently to that original GNP number, looking for any repeatable patterns. The most important pattern became apparent early on: When the US economy was in good shape, there weren’t many revisions following the original release of the GNP data, but when the US economy was heading into a recession, the number of revisions following the initial release soared. And worse, the original revision tended to be followed by further revisions, eventually stabilizing the originally released GNP number at a much worse level. It was as if the government wanted to leak the bad news a little bit at a time.

We stayed away from pointing out the potential political motivations that might have fueled such practices, but the reasons were obvious: If things look bad heading into an election, or if the turn down was becoming particularly severe, it would be easy enough to release a “more robust” GNP number, and then slowly lower the originally rosy GNP number in footnotes that no one pays much attention to as each succeeding set of GNP numbers are released down the line, finally bringing the original GNP number down to the level where it should have been.

If you pay any attention to the major economic releases in the United States, you’ll know that this pattern is even more prevalent now than when we did the original study in 1979-1980. Once you know about this pattern, you never look at the government released economic statistics in the same light. For instance, we have been in a recession for at least the last four months, and you can make the case that if you adjusted the current GDP growth with a realistic rate of inflation (instead of the “massaged” US government GDP measure of inflation), the US has been in a recession since early 2007! How bad are the revisions? The government originally reported in early October 2008 that the economy lost 240,000 jobs. One month later, the negative revisions released in the footnotes of the November unemployment figures increased that same October’s job loss figure from a loss of 240,000 jobs to a net loss of 419,000 jobs! And if you don’t like these numbers, just wait until they release the numbers next month—they’re sure to revise them even lower!

More in Part 3 tomorrow…

I wish you all good trading!


Timothy Morge

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