While recent GDP readings have showed inconsistency repeatedly, investors should not ignore GDP readings totally, said IHS chief economist Nariman Behravesh.
But there are at least three different problems with the GDP data series. The first is seasonality; there are huge swings in seasonality – for instance the first-quarter data is almost always underestimated. The government doesn’t seem to know how to deal with the first-quarter GDP data – whether it’s bad weather or something else.
If investors go back in history, the GDP data is always way off, especially the first-quarter reading because of seasonal adjustment problems. Secondly, the Bureau of Labor Statistics allows the inventory numbers to swing the headline GDP reading a lot because inventory numbers are highly volatile. While the GDP reading bounces around, employment readings have been fairly steady.
To reconcile the apparent conflict, IHS analyzes a different number called final-sales-to- domestic-purchases because that takes out exports and inventories and gives a much more stable data series.
Thirdly, the current GDP framework was designed for the industrial age whereas global economies are in the information age; governments do not know how to measure the output of information companies. IHS doesn’t know what the GDP data measures anyway because the information technology sector has grown so much, he noted.
Asked if he looks at GDP readings or ignores them, Nariman said he looks past them – he first looks at them and then ignores them.
When the employment and GDP data conflict, the Fed goes with the jobs report because they believe it’s more accurate.
Asked to explain the phrase ‘the Fed is data dependent’ when the data itself can not be depended upon, Nariman said even he’s not sure what Fed’s data dependency means and that’s something the Fed is wresting-with to explain: which data points could be trusted and believed.
The Fed is obviously paying much more attention to the employment data even though that data has got some issues as well. However, in a sense, the employment reading is a more reliable guide to what’s going on in the underlying economy, he concluded.
You can watch the video here.