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With official U.S. stats too rosy, watch the market instead

Former CEO of General Electric Jack Welch speaks during the World Business Forum in New York on Oct. 5, 2012. Welch sparked an outcry with a tweet suggesting the White House manipulated job numbers for political gain.

Lucas Jackson/Reuters

Most people probably thought you had to be somewhat intelligent to run a big company like General Electric.

Then the former CEO of the giant conglomerate, Jack Welch, goes and throws that assumption into question by his conspiracy-twinged tweet on September's U.S. unemployment rate unexpectedly falling to 7.8 per cent. "Unbelievable jobs number … these Chicago guys will do anything … can't debate so change numbers," he wrote.

Chicago, of course, is President Barack Obama's home base, and the tweet was an obvious dig at the administration in this zany U.S election season. But the idea that U.S. bureaucrats would covertly cook the books to enhance the chances of one of the parties is laughable, to say the least.

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That's because government statisticians don't fudge economic numbers secretly in the back room under the watchful eyes of political operatives. Far from it. They do it quite openly.

Don't take my word for it. It's about the only logical conclusion from perusing the work of economist John Williams, proprietor of Shadow Government Statistics, a newsletter that investigates the effects of technical changes in the way the U.S. tabulates economic statistics. Mr. Williams then rather helpfully adjusts the official numbers back to what they would have been been had the changes not occurred.

He's found that practically all the government's changes to the way it crunches data confer a rosier hue to economic conditions. He contends current statistics are understating inflation, overstating real GDP growth, and playing down a broad measure of just how much unemployment exists in the United States.

U.S. statistics, for instance, indicate that by last year's fourth quarter, real GDP had eclipsed the total from before the 2008-09 crash, showing that the recession's damage to output has been entirely recouped. But Mr. Williams says the inflation adjustment the government uses is too low, leading to a GDP figure overstating the health of the economy.

Applying his adjustments indicate the economy hasn't fully recovered, and is just bouncing along bottom. It's a gut feeling, he believes, that people on Main Street share."I think you'll find that's pretty much the common experience if you ask most people to describe their business or what they've seen in the economy," he says.

There are a myriad of ways to massage numbers. One that suppresses stated inflation is to reduce prices for quality improvements, a tweak known as "hedonic" adjustments. The idea is that today's $1,000 computer has far more capabilities than the $1,000 model of yesteryear, so even though consumers are shelling out the same dollar amount, they're getting a better product and therefore conceptually are paying less. The CPI is consequently adjusted downward.

One of Mr. Williams' favourite hedonic fudges is the decision to lower the adjusted price that is used in inflation calculations for college textbooks with colour illustrations, based on the supposed higher quality. "My contention is that the average college student, unless he or she is an art student, doesn't care whether or not there are any colour pictures," he says.

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Another tweak: During the Clinton years, the United States stopped counting as jobless those who had been looking for work for more than a year. Mr. Williams estimates that the broadest measure of U.S. unemployment should be around 22 per cent. The government says it is only about 15 per cent.

Mr. Williams contends statistics that are difficult for the government to manipulate show the economy remains weak. Data on housing starts fall into this category. One of the official figures he believes is relatively accurate over time is the trend in non-farm payrolls. It's also been lacklustre.

What to do, given that the statistics might be too rosy? Mr. Williams suggests watching some market trends. He's following the trend in precious metal prices, assuming they reflect the market's inflation expectations, something that should be watched as the Federal Reserve is printing money again.

He also is following the Canadian/U.S. dollar exchange rate, which would give an early indication of deteriorating U.S. fundamentals. "I look at the Canadian dollar as a relatively bright safe haven here against the U.S. circumstances," he says.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More


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