The only surprise should be that anyone is surprised.
Those who are used to how frequently the word "unexpectedly" appears in reports about disappointing economic data certainly won't be at all shocked at a Friday Bloomberg News report by Steve Matthews and A. Catarina Saraiva telling readers that "U.S. economic data have been falling short of prognosticators' expectations by the most in six years." The report has three problems. First, it treats the latest U.S. jobs news as an upside surprise, when it's really the result of difficult-to-justify seasonal adjustments. Second, it acts as if the appearance of lots of downside surprises in key areas is a recent phenomenon. Finally, it fails to explain a likely underlying cause, namely that Keynesian-trained economists and analysts can't imagine that their models might be misleading them.
Here are several paragraphs from the Bloomberg report:
Surprise: U.S. Economic Data Have Been the World's Most Disappointing
It's not only the just-released University of Michigan consumer confidence report and February retail sales on Thursday that surprised economists and investors with another dose of underwhelming news. Overall, U.S. economic data have been falling short of prognosticators' expectations by the most in six years. The Bloomberg ECO U.S. Surprise Index, which measures whether data beat or miss forecasts, fell to the lowest since 2009, when the nation was in the deepest recession since the Great Depression.
There's been one notable exception to the gloom, and it's a big one: payrolls. The economy added 295,000 jobs in February and 1.3 million over four months, a reflection of a healthier labor market in which the unemployment rate has fallen to the lowest in almost seven years.
Most everything else? Blah.
... Citigroup keeps economic surprise indexes for the world, and its scoreboard shows the U.S. is most disappointing relative to consensus forecasts, with Latin America and Canada next, as of March 12. Emerging markets were supposed to be hurt by falling oil prices but are now delivering positive surprises. U.S. policymakers frequently talk about weakness in Europe and China, though both are exceeding expectations. And there's one rub. The surprise shortfall in the U.S. doesn't necessarily mean the world's largest economy is in dire straights (sic). It's just falling short of some perhaps overly elevated expectations.
... Data can be noisy, and a loud surprise on the downside can pave the way for performances that go on to beat expectations. Fed policymakers, who meet Tuesday and Wednesday, may need some positive surprises to begin to feel confident this year is on the right track.
As I noted last week, the only reason February payrolls came in as an upside "surprise" is that mediocre raw data was converted into numbers far more positive than they really were in the seasonal adjustment process. Given who is now running Uncle Sam's Bureau of Labor Statistics, whether such an odd conversion was due to the up-and-down results of the past five years or a more cynical manipulation is an unfortunately open question.
The suspicion here is that Citi's surprise index treats all data points as being of equal importance. Of course, they aren't. For example, I believe that a compilation of upside vs. downside surprises vs. expectations in reported growth in gross domestic product would show far more "unexpected" downward revisions, with the middle two quarters of last year being relatively rare exceptions.
Then there are the numerous examples of data which looked strong in initial releases decaying in positivity once revisions have been made. After a while, one can't help but think that those involved are engaging in a "cushioning the blow" exercise.
Finally, the excerpt's final bolded reference to "overly elevated expectations" is telling. Economists and analysts seem to be merely relaying the results of feeding data into their Keynesian-based models without looking out of their high-rise windows to see what's going on in the real world. Given Keynesianism's failure to genuinely revive key economies around the world for over two decades (e.g., Japan), one would think that they might consider reassessing their models' important assumptions. That doesn't appear to be happening. Such a dogmatic adherence to Keynesian models also would largely explain why these same people were so frequently surprised by "unexpectedly" strong economic news during the middle of last decade as the effects of supply-side tax cuts took hold.
No one in the press ever seems to question whether the predictions they're given are based on weak assumptions — likely because so many of them have also swallowed the Keynesian koolaid, and go to certified Keynesians for their predictions and comments.
Cross-posted at BizzyBlog.com.
