Friday, April 10, 2015

"Washington D.C. Accounting Magic and Wall Street Greed"

That's the title of a very interesting article by Tony Sagami over at Mauldin Economics.  It underscores what I've said many times about the trustworthiness (or lack thereof) of official statistics.  Here's an excerpt.

The Commerce Department reported that wages increased by 0.3% and that American spending was up 0.1% in the month of February. That wasn’t much of an increase in spending, but Wall Street interpreted that as a giant victory given the heavy snow that covered the Northeast in February and sent the Dow Jones Industrial Average up by 263 points, or 1.5%.

Wall Street was impressed, but they shouldn’t have been, because those numbers were massively massaged and very misleading.

The Commerce Department used some accounting magic to come up with that positive spending number.

The Commerce Department uses something called the Price Consumption Expenditure or PCE deflator. The PCE is a mathematical attempt to factor in price changes to come up with inflation-adjusted numbers. The PCE deflator converts “real” numbers into “adjusted” numbers, and that’s where the deception lies.

More often than not, the massaged numbers are changed to fit the needs of our lovely elected officials in Washington, DC. In short, the PCE numbers are a bunch of crap.

But I digress.

Since October, the magic calculator of the PCE deflator had been flat or even negative, but the Commerce Department decided to change the PCE deflator to +0.2 in February. The excuse for the change was to adjust for the drop in gasoline prices.

That seemingly small adjustment to the PCE deflator changed the “real” numbers from negative to positive. Instead of personal spending being up +0.1% in February, the original unadjusted number was -0.1%.

So much for being positive.

And the PCE isn’t an isolated issue, either. There are all sorts of accounting hanky-panky going on in Washington, DC.

But perhaps the biggest impact on the Bureau of Labor & Statistics inflation model is the slippery concept of “Hedonic Quality Adjustment” that attempts to adjust for improvements in quality. Here is an example from the BLS’s own website.

Item A is an old TV model that’s been discontinued, and Item B is a new, fancy plasma TV.

The new TV costs five times as much as the old TV, but because the quality of the new TV is so much better, the BLS adjusts the price to factor in the higher quality.

The result of that massaging is that the BLS claimed that the “adjusted” price of the new $1,250 TV is actually 7.1% cheaper than the $250 TV.

Yup. 7.1% cheaper. Really!

The BLS applies this accounting magic to everything that’s part of the CPI, so all kinds of things we buy are getting “cheaper” even though they’re going up in price.

These lower prices help keep increases to things such as Social Security payments and TIPS (Treasury Inflation Protected Securities) bonds low.

There's more at the link.  Highly recommended (albeit infuriating) reading.



Coconut said...

It sounds like creativity is a vital necessity for anyone considering a career in accountancy.

On a less humourous note, I expect any corporation or individual who tweaked his statistics in this sort of way would end up in front of a court right sharpish; it's a shame that the only courts capable of influencing governments come in boxes of 20.

Mrs. S. said...

They should really leave the L out of the abbreviation; it would be more accurate.

lee n. field said...

"Hedonic quality adjustment"?


Of course we're being lied to.