'Tis the Season for Biased Economic Data?

According to a Washington research institute, the 2008 financial crisis has skewed U.S. data for the past four years.

Dror Raich
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Dror Raich

The entire world was watching the United States elections last week, eager to know who would steer the world's largest economy for the next four years.

The election campaign, too, was ruled by economic questions. The U.S. looks to finally be digging itself out of its financial slump, but the national debt is likely to cloud that progress in the coming months if not dealt with, and fast.

With or without elections, the U.S. economy is a key issue for investors and economists around the world. On a practically weekly basis, the world's newspapers and media outlets carry data on the U.S. economy. The most crucial statistics are unemployment and growth figures, followed by consumer and real estate indices. In their wake come important industry indicators like those for the auto, energy and financial services industries.

After the publication of the figures come the various analyses, in accordance with their ability to influence the bond and stock markets around the world.

The multitude of statistics coming out of the U.S. is likely to bewilder more than a few perplexed investors, even when taken at face value. But to add to the confusion there are economists who think that some of these figures aren't statistically reliable. According to their criticism, there is a built-in statistical flaw in the macro-economic statistics published by the U.S. government and American research institutions.

According to the critics, said statistical bias began in the fourth quarter of 2008 and the first quarter of 2009 – the very quarters during which the recent financial crisis struck. They allege that it stems from an attempt to adjust the economic data to control for seasonal changes, a move that eases the way for comparison between adjacent months and/or financial quarters.

Such tweaks reduce "statistical noise" in the data and help identify key underlying economic trends. For example, it is well known that that supermarkets see more turnover during peak holiday periods, like the High Holy Days in Israel and Christmas in the U.S. In order to figure out whether their numbers are actually going up or down, or just experiencing a regular seasonal blip, it's necessary to account for the seasonal effect on sales.

In the U.S. key macroeconomic indicators are published regularly by the Bureau of Labor Statistics and the Federal Reserve. Other indices and data are published by various independent research institutes. One such indicator is from the Economic Cycle Research Institute, a New York-based independent forecasting group. Called the Weekly Leading Index, it identifies turnaround points in the economy and is very important for investors, policymakers and even consumers.

"Most data, both public and private, are seasonally adjusted," wrote ECRI researchers. "But the nature of the Great Recession seems to have had an unexpected impact on the statistical seasonal adjustment algorithms that are hard-wired to detect when the seasonal patterns evolve and change over the years When the [U.S.] economy fell off a cliff in the fourth quarter of 2008 and first quarter of 2009, it was partly interpreted by these programs as a lasting change in seasonal patterns."

ECRI's analysts go on to explain that the economic statistics of the fourth quarter of 2008 and first quarter of 2009 were considered weak. As a result, they were seasonally adjusted upward, while the second and third quarters of 2009 were similarly revised downwards.

They also say it's hard to pinpoint the extent to which seasonal adjustments have skewed the figures since the end of 2008, but their analysis suggests that such a bias does exist.

Based on their analysis, the figures from the fourth quarter of 2010 and the first quarter of 2011 were better than expected, while the economic indicators from the second and third quarters of 2011 were worse than expected. In contrast, the economic indicators for the entire year, i.e. figures that weren't seasonally adjusted, didn't significantly deviate from expectations. It appears that this phenomenon recurred in 2012. In the second and third quarters of this year, large groups of macro-economic indicators came in lower than analysts' forecasts but met ECRI's presumed seasonal relationship.

Oppenheimer Israel investment house analyst Amir Argaman reinforces ECRI findings using the Citigroup Economic Surprise Index.

Citigroup's index essentially measures the gap between actual economic indicators and the median of Bloomberg News economic survey estimates. When this index has a positive value it means that the actual economic data was better than forecast, while a negative figure, conversely, means data was worse than expected.

The index is calculated daily and every survey figure carries a different weight, based on its potential to influence the dollar's foreign exchange rates.

"The cyclical nature in the fluctuations in Citi's index is astounding," says Argaman. "Through the index it's very easy to see that beginning with the fourth quarter of 2009, the economic data from the U.S. repeatedly beat expectations in the fourth and first quarters of each fiscal year and repeatedly missed expectations in the second and third quarters. In 2007 and 2008 there was no such trend. It seems that this is a relatively new phenomenon."

If we are indeed dealing with a cyclical bias in the published U.S. economic indicators, it would be possible to expect that in the coming winter months the economic data from the U.S. will continue to be relatively good. The bad news is that come this spring these figures are likely to disappoint again, and perhaps drag the financial markets into yet another downturn.

As temperatures drop, does economic data also get the freeze?Credit: Reuters