The most overrated economic indicators

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My column this week is about economic data, and the ways in which it can mislead (or at least send us into unnecessary tizzies). It was inspired by a stint of economic-indicator-watching during Christmas week. A GDP report came out that revised third quarter economic growth down to a 2.2% annual pace—from the 3.8% originally reported in October. And then a bunch of lesser data releases contradicted each other and didn’t really shed much light at all. As Ian Shepherdson of High Frequency Economics remarked in reference to an existing home sales release: “this number tells us nothing at all about the future.”

That got me thinking about what the most useless economic indicator might be. So I sent out an e-mail to a few numbers-watchers I know, phrasing the question slightly more politely. What was their “least favorite economic indicator?” I asked. “It’s got to be a number that comes out regularly and gets a reasonable amount of attention from the media and from markets, but that you think isn’t all that informative and/or reliable.” Here are the responses I got:

Mark Zandi, Moody’s I cherish all economic indicators, although it is fair to say some indicators are more useful than others. It is also important to point out the indicators I value most vary according to where we are in the business cycle and what is driving the cycle.  Having said this, the indicators that I generally pay less attention to include: FHFA house prices; weekly chain store sales; Challenger layoff announcements; and the producer price index.  These indicators are either often misleading or the signal to noise ratio is very high and thus hard to interpret.

Jan Hatzius, Goldman Sachs: My entry is the index of leading indicators, because it consists entirely of already-released information and the Conference Board’s forecasts, without adding new hard information. Another one is factory orders, which is largely a re-hash of the durable goods release.

Bernard Baumohl, The Economic Outlook Group (and former TIME economics correspondent): I would nominate the Index of Leading Economic Indicators by the Conference Board as one that most induces narcolepsy when it is released. This measure is merely a composite of other hi-frequency indicators that have already been published weeks earlier. So there’s nothing inherently new in the LEI—and thus the least useful in my opinion.

Andrew Busch, BMO Capital Markets: I would say the ABC consumer confidence. It’s a weekly number that doesn’t seem to make much impact on the markets….ever.

Harm Bandholz, UniCredit Markets and Investment Banking: My least favorite economic indicator is by a wide margin the ADP employment index (hope that is prominent enough). The guys at ADP have repeatedly revised the calculation methodology so that their index has some ability to explain payroll changes ex ante. But the out of sample forecasting ability is just awful. I do not understand, why anybody should follow the index.

Kurt Karl, Swiss Re: The ADP report—too inaccurate and not early enough to be helpful.

Robert Barbera, ITG: The consumer sentiment index. It lags changes in spending momentum. First they increase their spending. Then they read that spending is up and the economy is better. Then they tell pollsters they feel better.

Lakshman Achuthan, Economic Cycle Research Institute: I’d nominate two for different reasons: GDP growth and the Conference Board’s LEI. The former is misused and the latter is misleading.

GDP because it is falsely held up as the sole arbiter of recession, which can be hugely misleading, as in 2008, when, even in early September (pre-Lehman), when the economy had been in recession for nine months, most forecasters were still in “what recession?” mode, just because GDP growth had been positive in Q1 and Q2, the latter due to the transient effects of the first stimulus package. In fact, around June/July 2008, with the recession in full swing, the Fed was making hawkish noises about hiking rates (in the middle of a recession!) that the markets interpreted to amount to a one-percentage-point rate hike (from 2% to 3%) by year-end. The excessive fixation of economic forecasters on recent GDP data also led to major policy mistakes in Japan in the late 1990s, leading directly to sustained deflation (I can elaborate more on that if you wish). We wrote a piece about this in the spring of 2008.

Conference Board LEI because, even though its whole purpose is to predict recessions and recoveries, it has consistently failed to do so in real time. Case in point was April 2009, when its latest release showed a big drop—and without a single monthly uptick since June 2008, the Conference Board spokesman declared, “There’s no reason to think that this recession is going to end any time this spring or this summer”—when ECRI was predicting that the recession would indeed end by last summer.

Barry Ritholtz, Fusion IQ: (Instead of responding in an e-mail, Barry called up and bent my ear for half an hour. These are a couple of highlights from my notes.) If I had to pick the one that matters the least that people put the most stock in, that would have to be non-farm payrolls. (As Barry went on, though, it became clear he meant the headline jobs-lost/jobs-gained number; he finds other elements of the report such as temporary help employment, hours worked, and wages to be pretty informative.) Another we have to look at as not helpful at all is CPI. Thanks to the Boskin Commission, it has been rendered more or less meaningless. He (economist Michael Boskin) deserves credit for taking an otherwise valid economic indicator and pissing all over it. (Here’s Barry going on at length about his disdain for Boskin.)

One last note. In my column I write, after a brief summing-up of the results of my poll: “The thing is, I already ignore all these (relatively minor) indicators. I had been hoping to learn I could skip GDP or the employment report.” I know Lakshman mentioned GDP and Barry the employment report, but their complaint was that the headline numbers were used misleadingly, not that there wasn’t any useful information in the reports. And Barry’s complaint with CPI is that it is skewed toward underreporting inflation, not that it wasn’t informative. So I figured my short-hand description was okay. Was it? Also, after I sent out my e-mails, I learned that the Chicago Tribune had done a similar survey in 2005. The story doesn’t appear to be online anymore, but Barry—who was polled in that survey too—has a summary. (The winner: The Index of Leading Economic Indicators.)