Category: Statistics

Bad Government Statistics: Owners Equivalent Rent

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In 1983 they stopped counting actually counting housing costs in the consumer price index (CPI) and started using something called owners’ equivalent rent.

The argument was that it gave a better picture of inflation, but in reality, it just gave a smaller picture of inflation.

Among other things, it would have had the Fed tightening sooner, because inflation would have been high enough in early 2004-2005.

Go to the link for the chart pr0n. Of particular interest is that core inflation would be negative right now if we used the old metric.

Bankruptcies and the Birth/Death Adjustment

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When generating employment numbers, the Bureau of Labor Statistics (BLS)uses something called a Birth/Death adjustment, which is supposed to account for small new businesses that it misses in its surveys.

Well, the always quotable Barry Ritholtz has a question, is anyone at the BLS looking at the “death” part of the model?

Specifically, commercial bankruptcies are up 45%, but the BLS is still using their Birth/Death model to increase employment numbers.

New York City Develops Its Own Poverty Calculation

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My guess is that the city’s numbers are more accurate than the federal poverty numbers, because they consider things that the feds don’t, like medical expenses.

The number in poverty is 23%, as opposed to 19% under the federal numbers, and of course, some wanker at the American Enterprise Institute was quoted as saying that the poor are, “a lot better off than they were 20, 30, 40 years ago”.

Yep, let’s go back to outhouses and cholera for the poor, just to be fair.

The Real Misery Index

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The inestimable Barry Ritholtz notes that the Hedonically-Adjusted, Well-Spun, Nominal Misery Index, the sum of unemployment and inflation, is really 6 pounds of fertilizer in a 5 pound bag, and that if we used the same standards, because both numbers have been massaged into irrelevancy, and that if you used the metrics in place in 1980 or so, we would be at about the same number:

That’s right, we would be looking at 12% inflation and 9% unemployment under some measures.

Completely Bogus Government Statistics: Seasonal Adjustments to Inflation Edition

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I point you to some good work by Barry Ritholtz, who notes:

For example, crude energy materials “only” advanced 4.1% in April, with crude petroleum gaining 4.5 % and natural gas prices rising 4.3%. After the seasonal adjustments, these prices appeared rather odd: They showed energy prices falling by 0.2%, while gasoline costs dropping 4.6%.

It turns out that this all goes back into the numbers in July.

According to this article, if prices were flat, we would still see a 16.3% increase in July….Not pretty.

Another Financial Bigwig Says US is Goosing Inflation Statistics

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This time, it’s Pacific Investment Management Co.’s Bill Gross, who has been called, ” Called “the nation’s most prominent bond investor” by the New York Times.”

You can read his essay here:

The U.S. seems to differ from the rest of the world in how it computes its inflation rate in three primary ways: 1) hedonic quality adjustments, 2) calculations of housing costs via owners’ equivalent rent, and 3) geometric weighting/product substitution. The changes in all three areas have favored lower U.S. inflation and have taken place over the past 25 years, the first occurring in 1983 with the BLS decision to modify the cost of housing. It was claimed that a measure based on what an owner might get for renting his house would more accurately reflect the real world – a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of the substituted owners’ equivalent rent (OER), and which would have raised the total CPI by approximately 1% annually if the switch had not been made.

Me, I’d argue that he’s conservative in his estimates, and place the error closer to 3% than to 1%.

Note that as a bond trader, he is in a segment of the market most effected by these aberrations, and by virtue of being Bill Gross, the financial press will cover this.

More on the Inanity of US Inflation Statistics

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Barry Ritholtz notes that in addition to all the various hedonic ajustments, the CPI says that the average US consumer spends only 7.66% of income on food, as opposed to the numbers of 10% for the UK, 15% for the rest of Europe, and 18% for Japan, which is patently absurd.

Ritholtz states that the 4 bottom quintiles spend closer to 20%, which sounds about right.

According to Wiki, the median family income in the US in 2006 was 48,201.00, so let’s round to 50K.

8% of 50K would be $4,000, 20% of 50K would be $10,000. Assuming 3 meals a day and a 4 menber family over 50 weeks, we get $0.95 and $2.38 per meal respectively. The former is living exclusively on Kraft Macaroni and Cheese.

The fact is that when things like snacks, fresh vegetables, etc. are factored in, the per food cost probably gets closer to $5.00/meal for total food cost for a family of 4.

Our Bogus Unemployment Statistics

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David Leonhardt at the times has a very good article on unemployment statistics, and it explains how it has become less accurate over time.

Consider this: the average unemployment rate in this decade, just above 5 percent, has been lower than in any decade since the 1960s. Yet the percentage of prime-age men (those 25 to 54 years old) who are not working has been higher than in any decade since World War II. In January, almost 13 percent of prime-age men did not hold a job, up from 11 percent in 1998, 11 percent in 1988, 9 percent in 1978 and just 6 percent in 1968.

It’s a good read, and better written than I can do.

Markets Don’t Work as Predictive Instruments

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Paul Krugman has an rather interesting insight into the New Hampshire primary results, specifically he gives us this picture of the Intrade price for “Clinton wins the Democratic nomination” bidding:

These investors in this market, you know the one that is supposed to predict the future, got it completely wrong. In fact, as time went on more and more of them got it wring (the bar graphs are at the bottom). Dr. Krugman notes, “There’s no hint that the market saw either Iowa or New Hampshire coming, or knew anything beyond the bloviations of the talking heads.”

That is the little picture, but there is a bigger picture, and that is that markets are not some sort of magically predictive tool. They are simply a sort of group guessing game.

One of the arguments for the increasing use of arbitrage is that by creating derivatives, like futures market, help the economy, because of their ability to predict future market swings.

The answer is that they don’t. What more, as can be seen on an almost weekly basis, these instruments contribute to price swings, and make commodities more active, by adding another layer of profit taking on the way to market, though, to be fair, they employ no-account Harvard MBAs.

There are cases where futures markets are essential. Without the ability to buy rubber for delivery at a later date, for example, bidding on OEM tires for a car manufacturer would be risky and more expensive, but now we have entities like stock futures, which are unnecessary, make the market more volatile, and encourage speculation at the expense of investing.