Wednesday, June 18, 2008

The data is not the economy

The map is not the territory - Alfred Korzybski

The Washington Post's Neil Irwin explains Why We're Gloomier Than The Economy:

Ask Americans how the economy is doing, and their answer is stark: It is not just bad, it is run-for-the-hills terrible. Consumer confidence is at its lowest level in almost 30 years. Only 12 percent of Americans think the economy is in good shape. On the Internet, comparisons to the Great Depression are widespread.

But the reality is different. According to most broad measures of how the economy is doing, it's not all that grim.

Soft? You betcha. In recession? Quite possibly. And a crisis in the financial markets has rattled nerves for months now. But so far, the economy is holding up better than it did during the last two recessions in 1990 and 2001. Employers haven't shed as many jobs, the unemployment rate is still relatively low, and gross domestic product has kept rising. Things are nowhere near as bad as they were in the Great Depression, or even during the severe recession of 1982-83. The last time consumers were this miserable, in May 1980, the jobless rate was 7.5 percent and inflation was 14.4 percent. Now those numbers are 5.5 percent and 4.2 percent respectively.

OK, that wasn't the explanation, just the statement THAT consumer confidence data isn't holding "true" to historical norms.

Here's the explanation:

But now, coming off two decades of prosperity and low inflation, Americans have come to treat low unemployment and inflation as givens. We have gotten so used to things being good, in other words, that even when conditions become somewhat bad, it feels terrible.

Perhaps he is on to something here. Prior conditions "color" current perceptions, to an extent. 65F can feel quite cool when coming from 90F and quite warm when coming from 20F.

While this phenomenon might explain some of the apparent disconnect, I think a more obvious cause of the disconnect are the changes to unemployment and inflation data since the 80's.

A recent report (April 8, 2008) by John Williams of Shadow Government Statistics speaks to this issue:

Net of gimmicked methodologies that have reduced CPI inflation reporting and inflated GDP reporting, the U.S. economy has been in a recession since late-2006, entering the second down-leg of a multiple-dip economic contraction, where the first downleg was the recession of 2001 that really began back in late-1999. Annual CPI inflation currently is running around 11.6%, again, facing further upside pressures.

An older report (Sept. 2007) touches on Unemployment:

The statistically-sounder household survey showed seasonally-adjusted employment tumbling by 316,000 for August, following a 30,000 decline in July. The seasonally-adjusted U.3 unemployment rate held at 4.64% +/- 0.23% in August, versus 4.65% in July. Unadjusted August U.3 fell to 4.6% from 4.9% in July, while the broader U.6 measure eased to 8.4% from 8.6% (unadjusted) but rose to 8.4% from 8.3% (adjusted). Net of the "discouraged workers" defined out of existence during the Clinton Administration, the traditional unemployment rate continues to run around 12%.

It looks to me as if the consumers have a better sense of things than the data crunching economists, for they are not laboring under the view that the data is the economy. For them the economy is just what they experience in a monetary sense. While the change in oil prices has not been as rapid as in the 73-74 or 79-81 period, a trebling of oil prices is a trebling of oil prices (to wax tautological).

I am reminded of a little short story by Jorge Luis Borges:

Of Exactitude in Science

...In that Empire, the craft of Cartography attained such Perfection that the Map of a Single province covered the space of an entire City, and the Map of the Empire itself an entire Province. In the course of Time, these Extensive maps were found somehow wanting, and so the College of Cartographers evolved a Map of the Empire that was of the same Scale as the Empire and that coincided with it point for point. Less attentive to the Study of Cartography, succeeding Generations came to judge a map of such Magnitude cumbersome, and, not without Irreverence, they abandoned it to the Rigours of sun and Rain. In the western Deserts, tattered Fragments of the Map are still to be found, Sheltering an occasional Beast or beggar; in the whole Nation, no other relic is left of the Discipline of Geography.