Wall Street Economist v. Rick Davis: Mano a Mano
Posted by Larry Doyle on July 1, 2010 10:37 AM |
I love a good debate, or at the very least a healthy response to a challenging statement. I witnessed just such an exchange yesterday.
I shared my story, Rick Davis Nailed 1st Qtr 2010 GDP Report on November 30, 2009, with a noted Wall Street economist, with whom I am friendly and whom I hold in high regard. Recall that in the aformentioned story, I highlighted that Rick Davis of Consumer Metrics Institute is projecting a double dip recession with a 2nd Qtr 2010 GDP reading of -1.5% and a 3rd Qtr GDP reading of -2.0%.
In sharing that commentary with this well known economist, I received the following response:
With 2/3rds of the data in for the second quarter, there is not a shred of evidence that points to a decline in GDP in the second quarter.
Interesting. Well, I redirected that response to our friend Rick Davis and received a riveting response:
Your reader is correct, there is no official data supporting a contraction in the second quarter. But that’s the point, isn’t it? They’re measuring the economy at the wrong place. Let me expand:
A) First of all, I am dead certain about what consumers are (or are not) doing. We measure that in a timely manner with accuracy and reliability. I’m not shy about saying what those numbers are telling us.
My problem is that I can’t say the same for the BEA’s GDP, for several reasons:
1) Their 1937 based focus on factories. Factories are WAY downstream from where the real economic action is, probably 4 or 5 months. I understand why a factory focus was chosen in 1937 (given FDR’s constituency and 1937 jobs demographics), but the economy is much more than factories in 2010.
2) Their questionnaire approach, which (as you know) leads to survivor and large firm biases. Not to mention lags and revisions when the data does finally come in.
3) Their inclusion of non-demand driven inventory adjustments, which is a natural consequence of reconciling demand to production.
4) Their (understandable) inclusion of non-consumer stimuli (e.g., 747’s, aircraft carriers & interstate highways). Federal stimuli run amuck should bias their numbers substantially.
5) Our numbers are strictly year-over-year growth, which require no seasonal adjustments. Their numbers are “annualized” growth, seasonally adjusted.
B) Given the above, although I am certain that we know what consumers were demanding during time periods that will flow down to the factories in the 2nd and 3rd quarters, we have no clue what factories will be doing to their inventories at those same times.
To be brutally honest:
1) We are certain that consumer demand on November 30, 2009 was growing at a 2.62% year-over-year rate. That demand should have flowed to factories during the first quarter of 2010.
2) The BEA benefited from utter and blind luck to get that close to the correct number. A full 2/3 of their number came from factories unwittingly growing inventory in anticipation of soaring demand during the summer (we’re actually waiting for the other shoe to drop when factories draw down inventories in the third quarter).
How about that for hubris? We’re right, and the BEA was lucky to match our number?
I fully expect to have people calling for my scalp when the BEA misses what is happening on Main Street (i.e., not Wall Street or even Detroit) during the second quarter, getting the data wrong because of the items (A.1-A.5) listed above. C’est la vie.
But what do I actually expect the BEA’s flawed numbers to be? Probably flat for the second quarter, but with the inventory reversals killing the number just 4 days before the mid-term elections.
Consumer Metrics Institute
Fascinating stuff and a wealth of sense on cents to those of us who enjoy monitoring and navigating the economic landscape. Two highly intelligent and informed individuals trying to assess and project economic growth.
I am not fading Rick. In fact, I believe the markets currently are trending toward his line of reasoning and analysis. Do the markets have negative GDP numbers priced into them at current levels? Not a chance.
Thoughts and comments encouraged and appreciated.