Good Data, Bad Information

Corporate profits are beating expectations. Retail sales are strong. Orders for durable goods and services are surging. Tax receipts are at record highs. US payrolls are expanding and unemployment sits at multi-year lows. Long interest rates are benign and liquidity is plentiful, yet inflation is tame. US household net worth is growing. Demand for energy, particularly gasoline, is swelling despite record high prices. Even sales of existing home prices are far stronger than many anticipated.

There isn't much ambiguity. These are clear signs of very strong economic growth.

Yet, the Commerce Department told us this week US GDP expanded at a measly 0.6% annualized rate in the first quarter. The salient reasons for the weakness, according to the financial press, were the housing market, trade deficits, and reduced business inventories. If you believe any of this, then we've got some beachfront property to sell you in Antarctica.

Never mind GDP is revised no less than three times after the initial reading, or that revisions can vary wildly each round. Never mind the markets didn't falter even for a moment on the news and stocks continue their march upward. The government says that's what the economy did, so it must be true.

Clearly, we've got a contradiction. One of these is an illusion—either our stockpile of evidence or the government's statistic. All the meaningful underlying evidence we see points to strong growth, but the government says we barely had an economic pulse last quarter.

US GDP numbers are a perfect example of the difference between data and information. We have no doubt the US Commerce Department employs a crack team of statisticians with access to an unbridled repository of data. But data in itself isn't worth much. The key is to convert data into useful information. When trying to glean information others can't fathom, or disprove things others believe, government data is usually one of the easiest targets of all to attack.

Too many people misperceive GDP as if it were a hard count of what the economy has produced. The economy is so vast and diverse the best that can be done is conduct numerous surveys and extrapolate numbers based upon assumptions and past data. GDP is a highly qualitative number and really more like a best guess of the economy's product rather than a tangible count of anything. That's one reason strange results are common and revisions are needed.

We're not really GDP haters. In fact, it's one of the only consistent measures allowing for "apples to apples" comparisons of economic growth through history. In this way, it's very useful. But you know something isn't right when the sum of existing hard evidence just about completely contradicts the official GDP number. We quote from a recent Bloomberg story: "Last quarter may prove to be the low point for the economy because recent reports showed that business spending has improved and leaner stockpiles have prompted factories to lift production." As calculated today, GDP is so wonky that economists must fuss around with inventory levels in order to account for the weirdness of the number. Does that seem right to anyone? It's a classic case of the tail wagging the dog—economists are trying to find economic justifications to explain GDP rather than GDP explaining the economy. Why not adjust GDP methodology to better reflect reality than look for ways to explain the misleading number?

Most importantly, markets and stocks don't care about GDP numbers because they're backward-looking. GDP is all about the past, and stocks only want to look forward. We've stressed the need for a global view many times before and this is no exception. Global economic growth is surging, and the US economy is far too linked with the rest of the world not to grow along with it.

The best bet for investors is to generally ignore GDP and its revisions. The always forward-looking stock market will tell you how the economy is doing before the government can, anyway.