On revisions, episode IV (A New Hope?)

May 28, 2009 in Economics

Durable goods +1.9% vs 0.5%! Durables ex-transportation +0.8% vs -0.3%! Initial jobless claims 5k under expectations!

The headlines looked pretty good at 8:30 am, until you took a look at the revisions. Indeed, today's economic numbers serve as yet more examples of creating the false perception of growth by changing the past.

Durable goods orders were expected to rise 0.5% in April after falling -0.8% in March. The April number blew by the expectation, coming in at +1.9%, but the March reading was revised down to -2.1%. Let's re-normalize the durable goods index at 100 in February and follow the chain: analysts thought the index dropped to 99.2 in March and expected it to rise to 99.70 in April. Today's report demonstrates that the actual path was 97.9 in March and 99.76 in April. Thus, the endpoint of the actual path ends up being only 0.06% higher than the expectation, not 1.4% as the headline would suggest.

Durable goods ex-transportation is even more dramatic - the April number was 0.8% vs an expected -0.3%; March was revised from -0.6% to -2.7%. I won't bore you with the index path, but the result is that the endpoint is 1.33% lower than the expectation, not 1.1% higher!

Initial jobless claims beat the expectation by 5,000... after the previous month was revised to be 5,000 worse.

The 10:00 am headlines weren't much better. New home sales missed expectations by 8k and the March figure was revised 5k down as well.  February sales were revised upward 4k, which only made the March number worse. The MoM % difference statistics that go hand-in-hand with the absolute numbers are poor, as you might expect, especially given the February revision. But the most amazing thing to me is the confidence interval around these statistics: about plus or minus 15% (pdf link)!

It continues to amaze me that the market takes these numbers so seriously, given their inherent statistical variability. Moreover, the tendency of the market to look at headlines and ignore revisions speaks to investors' myopia, or at least the overwhelming influence of business commentators on TV, who never seem to grasp the revision concept at all.

And I haven't even addressed mortagage delinquencies, which continue to skyrocket...

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