Cool technology, questionable accuracy. Photo by Automatt/Getty Images.
So, for the holidays my wife received one of these newfangled wearable fitness devices, touted to spout customized daily data about her fitness. Feel better! Get fitter! Improve your life with a plethora of data! Within a couple days, something was obviously way off—she would run a couple miles and the device said she’d barely moved!
Turns out, these things are not nearly as accurate as widely believed. They are probably inaccurate to the point of not being particularly useful. Spokespersons representing these companies are now saying things like “…for many people, they’re inspirational, and if using one gets someone to move more, then as far as I’m concerned, it’s serving a good purpose.”
What if I told you most macroeconomic data spewed forth into the world each day are no different?
Take this headline: “US Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead.” What should investors do with it? Sell, because it portends more bad news ahead for the US economy? Buy, because it’s an opportunity?
I’d argue neither. As someone who has studied this stuff for well over a decade, I can tell you that there is more disinformation than real information in this report. Yet folks trade on this and similar data constantly.
Macro data—that is, data aggregating a large swath of economic activity—is far, and I mean far, less accurate and meaningful than widely held. For some fun, google “economic revisions.” You’ll get 46 million results. Even something as widely accepted and seemingly ironclad as GDP is revised twice quarterly—and we aren’t talking teensy revisions of a few hundredths of a percent, revisions can swing several percentage points each iteration! (And other revisions follow years later, for good measure.) For an approximately $17 trillion economy, a swing of just one percent is about 170 billion bucks.
What macroeconomic data can tell you about is generalities—trends, overall patterns. Getting too bogged down in specifics is time wasted. Economies aren’t consistent at monthly or even quarterly timeframes, and anomalies abound in the interim.
For several years running, early macro data releases have shown temporary weakness or minor disappointment in economic numbers …leading economists to revise down their growth forecasts …leading to downward earnings growth revisions …leading to investor angst…only to be proven nonsense by the time the year is over. That seems to be happening again in 2015.
There are three big lessons here:
We may be in the era of “big data”, but measuring big broad economies is a messy business that is far less accurate than most recognize and will be for a long time.
The speedier the reporting and shorter-term the data, the more inaccurate the report probably is, hence it is subject to larger revisions.
Revisions are not minor—they can be huge.
In action, these three lessons mean: understanding each macro data point is part of a trend; not all data points perfectly align with that trend; and not to sweat any specific data point too much.
Alas, most investors can’t bring themselves to follow this message, despite its near-uniform wisdom in this (and other) market cycles. It also means less stress for you—all the teeth-gnashing over a 0.1% difference in GDP, or one month’s retail sales data, is an utter waste of human life force.
Over time, wearable gadgets will improve. And so will economic data. But recognizing the difficulty in accurately assessing a single complex system like a human—let alone an entire economy of them—will help you make better investing choices.
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