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Where is the Truth in Government Numbers?


On May 2, 2021 the Bureau of Labor Statistics, a division of the Department of Commerce, released the April 2008 employment numbers showing a drop of 20,000 jobs and unemployment fell from 5.1% to 5.0%. The Bureau of Economic Analysis, another Department of Commerce division, released a report that Gross Domestic Product grew by 0.6% in the last two quarters, annually. Before inflation is included, it grew 3.0% in the fourth quarter and by 3.2% in the first quarter.

If you are learning to invest and wish to beat the market, it pays to dig a little deeper into the headline numbers released by the government. For example, watching the prices of food and fuel rise and talking to people who either are out of work or worried about their jobs, makes me wonder whether someone is hiding the truth with statistics. Let’s see if we can look in more detail to see where the real truth lies.

Now I Have a Part Time Job

You might be asking, how did unemployment go down in this economic environment with a loss of 20,000 jobs. It turns out that much of the reason has to do with how the BLS counts employed people. In the non-agriculture household employment category, part of the household survey, fulltime employment fell 375,000. However, the number of people working part time increased significantly. The BLS counts those who work part time as employed. It does not matter if they are willing to work part time or they are forced to do so. While working part time is better than not having a job, it still is not the same as full time. Counting part time work the same as someone who works full time, hides the truth in the real story. People are loosing their jobs and having to scramble to find any way to make some money.

Statisticians need to use various methods to develop their estimates. The BLS uses a ratio model to estimate the number of new jobs created or lost by small businesses. Known as the birth/death ratio (interesting name), it is based on past experience and it is a trend following number. This works fine as long as the growth in jobs remains on trend. When there is a change in the trend, this statistical ratio can over state the growth in jobs when the economy slows down and can understate the number of jobs lost when the economy turns back up. You can see the birth/death ratio numbers here.

In March 2007, the Bureau adjusted the model to establish a new benchmark level. The trend in the Net Birth/Death Adjustment trended down through 2007 from 262,000 new jobs in April 2007 to 70,000 new jobs in December 2007. Then in January 2008, they reported 378,000 jobs were lost. In February 2008 135,000 new jobs were created followed by 142,000 in March and then 267,000 in April 2008. Leisure & Hospitality added 83,000 new jobs followed by 72,000 in Professional & Business Services in April. Construction added 45,000 and even Financial Activities added 8,000 jobs. This job growth does not seem to match with the cutbacks in the economy. For example, if people were tightening their purse strings, then why would Leisure & Hospitality show job growth? Are people eating out more and spending their money when the cost of food and fuel are rising so fast? If it is true, then the underlying economy is more resilient than many believe. If not, then these numbers are misleading at best and we will see downward revisions.

Will the Real GDP Number Please Stand Up

The GDP in the first quarter was up 0.6%. This growth in GDP includes a number of economic items that in their total add up to the GDP for the quarter. One of those items, the level of inventories, grew 0.8%, or faster than the level of GDP. Inventory growth is fine, when we have a robust economy, as companies are building for future sales. If sales are slowing then inventory growth becomes a drag on the economy as the higher level of inventories must to be worked off or lowered in value at some time in the future. If a store is adding more inventory then it sells each month, eventually it will have to either stop buying new inventory, so it can balance the level of sales with its inventory, or it will have to conduct an inventory reduction sale, selling goods for less profit or even a loss. In either case, it hurts the overall profit of the store. Well, the same holds true for the GDP number. We are likely to see the impact of the inventory reduction in the second or third quarter GDP numbers.

As I mentioned earlier, the GDP of the U.S. grew 0.6% in the first quarter of 2008 with inflation coming in at 2.6%, giving us a nominal growth rate of 3.2%. As you might realize the level of inflation has a significant influence on the true growth rate of the U.S. To be fair, measuring inflation is difficult at best. It turns out there are several government agencies that attempt to measure inflation. The Bureau of Economic Analysis is the division that publishes the GDP statistics and the inflation number just mentioned.

The better-known Consumer Price Index (CPI) is another measure published by the Bureau of Labor Statistics. I have used their inflation numbers in earlier articles. Since November 2007 the inflation rate has been above 4.0% with January at 4.4%, February at 4.1% and March at 4.0%. If we use 4.0% as the measure for inflation (the low point for the quarter rather than the average) the GDP for the first quarter would have been a negative 0.8%. By the way, the fourth quarter would also have shown negative GDP growth if the CPI were used instead of the BEA’s inflation number. That means the U.S. may have already experienced two consecutive quarters of economic contraction, one of the indicators used by the National Bureau of Economic Research (NBER) to identify a recession.

What about the Federal Reserve’s measure of inflation? They use a different measure called Personal Consumption Expenditures (PCE). According to the PCE inflation was 3.9% for the fourth quarter of 2008 and 3.5% for the first quarter of 2008. There is a table comparing the PCE with CPI here. If we used this inflation number, the GDP for the fourth quarter would have been negative 0.9% and negative 0.3% in the first quarter of 2008.

The Bottom Line

Investors cannot use the headline numbers on the performance of the economy at their face value. These numbers are widely published and used by every talking head as fact. Yet as shown above, it is important to dig deeper to understand what the underlying trend shows. When you do, you usually get a different picture. This insight should give you a better understanding of the potential for the economy and how it might affect the markets.