Thursday, May 28, 2015

Geek Wars: Economists Fight Over Accuracy of Government Reporting

It seems that we can't be too sure about anything these days. When the 2015 first quarter GDP number was announced, it came in way below most economists forecasts including the Federal Reserve. This, of course, is somewhat embarrassing. Jim Rickards says it is not surprising. He claims these economists are using the wrong forecast models based on outdated assumptions which leads to the wrong forecast results. And it appears Jim is not alone in questioning the models economists use to make forecasts (click here for more on that).

Now it looks like some of those who keep missing the forecasts would like to blame inaccurate government reporting for the problem. This AP article talks about what I will call the "geek wars" now going on to assess blame for the poor forecasting results. Below are some quotes from the article.

"There's something strange about the U.S. economy in the first three months of every year: It frequently grows at a much slower pace than in the other nine months.

And on Friday, the government agency charged with calculating the economy's growth rate said it would adjust its methods in an effort to resolve the problem.

The changes could paint a much different picture of the economy's recent performance. Concerns flared when the government said late last month that the economy expanded just 0.2 percent at an annual rate in the first quarter. But many economists have challenged the government's data, and some have argued the first-quarter figure should be as high as 1.8 percent instead."

. . . . . . 

"Researchers at the Federal Reserve Bank of San Francisco argued that under a different method of adjustment, first-quarter growth this year would have been 1.8 percent, rather than 0.2 percent. The government seasonally adjusts components of gross domestic product, the broadest measure of the economy, before adding them together. The researchers argued that the final, aggregate data should also be adjusted.

Other economists, including at the Federal Reserve in Washington, have concluded that the government's figures are largely accurate. The first-quarter weakness over the years may be due to harsh winter weather and "statistical noise," they concluded."

"The Commerce Department's Bureau of Economic Analysis, which produces the figures, will have the last word. The agency says it "is working on a multi-pronged action plan to improve its estimates of gross domestic product." (see related link below *)

My added comments:

What can we take from all this? It looks like to me that we should pretty much take any numbers that are forecasted (and now even the actual calculated numbers) with a large grain of salt. It's pretty clear there are internal geek wars going on about the reliability of the information. May the best Geeks win.

Added notes: In case the above does not convince you to take things with a grain of salt, we have Fed Chairwoman Yellen admitting whatever forecast she puts out will be wrong. Here is that quote:

"I am describing the outlook that I see as most likely, but based on many years of making economic projections, I can assure you that any specific projection I write down will turn out to be wrong, perhaps markedly so."   ----  Janet Yellen

* We also have this article that appeared on David Stockman's site that questions whether the Bureau of Economic Analysis (BEA) is just trying to make a weak economy look better with its new "action plan to improve its estimates of gross domestic product".

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