Economic Data Releases: Revisions can Kill You!

I watch the markets with interest when major economic releases vary from expectations.   If you don’t like the data today, just wait until next month and likely you will like it (or hate it) even more.

Many economic releases are not accurate when first issued.  The data is revised for months after the initial headline value.  In the case of the Chicago Fed National Activity Index (CFNAI), which is the weighted super coincident index of 85 “economic” indicators, literally the entire index values move every month because of repeated backwards revisions.

When you consider that the recession line is -0.7 for the CFNAI – then having data revisions some months of over 0.8 makes the index almost worthless in real time.  You can be in deep doo-doo if you hang your hat of the monthly output (full analysis here).

The Federal Reserves Industrial Production (IP) is another index that months of backward data revision comes with each month’s release.

Using the current values, we see the IP index slowly trending up.  The original release values give a feel of stagnant growth with a slight improvement trend.

But the biggie in misleading initial estimates is the BLS Jobs Report.  Remember the August 2011 headlines screaming there was no jobs growth?  That month ADP said jobs growth was 91,000 – and surprise, surprise – the BLS’ current estimate is 104,000.

The above graphic is the month-over-month change in employment based on the original headline non-farm employment level and the current stated employment levels at month end.  You will note some pretty drastic backward revision for a major economic release the market reacts to in real time.  The BLS data is extremely valuable after it is a year or more old.  But it simply cannot be trusted to give an accurate current view.

It should be obvious that forward indicators which use data which is continuously revised will end up eventually giving the right answer – just not in real time, and likely in hindsight.    As a systems person, the problem with many of the major indices is that the data gathering methodology incompatible with the release dates.  Either the release dates need to be changed, or the data gathering methods need revision – or both.

It does not benefit anyone to release data which will be significantly revised.

Economic News this Week:

The Econintersect economic forecast for November 2011 continues to predict weak growth.

ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown. Although Econintersect’s data is not recessionary (one month look-ahead) – we take this recession call seriously. This week the actual level of ECRI’s WLI index was less bad for the second week in a row but still indicating the economy six months from today will be worse.

Initial unemployment claims fell 10,000 (from 400,000 which was revised up from a preliminary 397,000 last week) to 390,000. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell slightly to 400,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

Overall the data this week continued to show a weakly improving economy. There were no recessionary flags.  The weakness this week is the traders and investors running around like old women.

Weekly Economic Release Scorecard:

Euro Banking: Is it time to pull your money out of the bank?
China: Are reserve ratios working to constrain credit growth?
November Michigan Sentiment: Sentiment improved to 64.2 but at recession levels
October Export / Import Prices: Very large decline in export prices
September Trade Balance:  Trade deficit declined due to less oil consumption
September Wholesale Sales: Up 14.8% YoY
October Diesel Consumption: Up, breaking down trend & now expanding YoY
September JOLTS: Shows some upward pressure on jobs growth
Greece & AIG Bankruptcy: One is giving haircuts while the other did not
September Consumer Credit: Growth is all student loans
Greece: What will the correct path look like out of this crisis
Investment & Labor: No economic driver as investment & labor are in disarray
October Rail Traffic: Finally, rail traffic is trending up
John Paulson: Maybe he is not having good luck this year
Treasuries: A suddenly hot market
October Equities:  A good month to have been invested
Investing: Markets which are benefiting from growing wealth
Europe: Should your investing horizon ignore the daily Euro News?
Market Melt-up:  The Euro mess solutions are not workable
World Interpretation: Using an erotic picture to explain possible outcomes
Harvard Economic Students: A sarcastic response to their protest
Economics: Is there an unholy relationship between academics and business?
Inequality: Have big business and the rich unbalanced global economies
Euro Solutions: Is the game plan just to keep kicking the can down the road?
Government Regulatory Advice: Is the fox advising the farmer on his chickens?
Euro Banking: Bailouts won’t solve the problem

Bankruptcies This Week: Dynegy Holdings, Jefferson County (Alabama)

Failed Banks this Week: