Goldman says U.S. data may look better than they are
By Bob Willis Bloomberg News
WASHINGTON - A decline in unemployment and pickup in manufacturing point to accelerating U.S. growth. Some economists say the numbers may not be as good as they look.
One reason: the severity of the economy’s plunge in late 2008 and early 2009 after Lehman Brothers Holdings Inc. collapsed threw a wrench into models used to smooth the data for seasonal changes, according to analysts at Goldman Sachs Group Inc. and Nomura Securities International Inc.
The jobless rate has dropped 0.4 percentage point over the past two months, according to the Labor Department, and the Institute for Supply Management’s factory index has climbed more than three points since the end of August. Signs the world’s largest economy was strengthening helped propel a 14 percent gain in the Standard & Poor’s 500 Index in the past eight weeks.
“The impact of the financial crisis does seem to have affected seasonal factors for several indicators,” Andrew Tilton, a senior economist at Goldman Sachs, said in a telephone interview from New York. It “might tend to make things look a little better in the early winter and look a little worse in the spring time.”
Most economic data are adjusted for seasonal changes to facilitate month-to-month comparisons. Without those changes, for example, construction would always pick up in the summer, when the weather is milder, and decline in the winter.
The adjustment process in unable to distinguish between a one-time shock, like Lehman’s demise, and a recurring issue that would need to be smoothed away. For that reason, the mechanism gives some data a leg up from about September through about March before turning negative the rest of the year.
The economy contracted at an average 7.8 percent annual pace from October 2008 through March 2009, the worst back-to- back quarters in the post World War II era. The 18-month recession ended in June 2009.
The adjustment process “has been knocked out of whack by the financial crisis,” Ellen Zentner, a senior U.S. economist at Nomura in New York, said in a telephone interview. “The model ends up adjusting for a growth pattern that isn’t there. The sudden drop-off in economic activity in late 2008 is not a pattern, it doesn’t happen late every year. It was a one-off event.”
“Around April the seasonal bias turns and starts working against the data,” said Zentner, who shared her findings in research notes issued in December and last week.
Nomura was the fourth-best employment forecaster for the two years through December, according to Bloomberg calculations. Goldman Sachs was No. 1 among forecasters of gross domestic product during the 12 months through June 2009.
Stocks were little changed Monday as European finance ministers gathered in Brussels to discuss new budget rules and a Greek debt swap. The Standard & Poor’s 500 Index rose 0.1 percent to 1,317 at 9:40 a.m. in New York.
French business confidence unexpectedly fell in January to the lowest in almost two years, providing the latest sign that Europe’s second-largest economy is mired in a recession, figures from the statistics office Insee showed Monday in Paris.
Elsewhere, prices paid by Australian producers decelerated in the October through December period for a third straight quarter, boosting scope for the central bank to lower borrowing costs next month, data from the Bureau of Statistics showed in Sydney.
The U.S. seasonal distortions are most acute for the jobless rate, according to a report by Tilton issued Jan. 13. The shift moves the rate by about a tenth of a point per month on average relative to the adjustment before the crisis, he said. The influence is most positive from November through January, Tilton’s research showed.
The overcompensation probably accounts for about 0.2 percentage point of the 0.4-point drop in the jobless rate over the past two months, according to Zentner’s calculations.
Economists at Goldman Sachs forecast unemployment will average 8.5 percent this year, unchanged from December’s reading. Nomura’s estimate is 8.4 percent. Zentner and Tilton agree that data on GDP aren’t affected by the seasonal issues.
In addition to the unemployment rate, the other indicators that show a marked influence include retail sales, consumer prices excluding food and fuel costs and the total number of people on jobless benefit rolls, Tilton said.
Chris Rupkey is among those who are more optimistic.
“Forecasters have moved too far to the other side of the boat, they’ve gone too pessimistic,” said Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who forecasts unemployment will average 8 percent this year. “The data is surprising to the upside and that leads us to believe the entire year will surprise the market.”
The ISM’s factory gauge has also been skewed by the seasonal adjustment issues, according to Tilton’s and Zentner’s research. Tilton estimates the deviation from the pre-crisis adjustment averages about 0.35 point a month, and the most positive influence occurs from September through December.
The manufacturing index was at 53.9 last month compared with 50.6 in August, last year’s low point.
The bias stemming from the financial crisis has been accompanied this year by warmer and drier weather than usual, which has also boosted some data, said Tilton.
“The housing-related data probably benefited from the fact that the weather was relatively nice in December,” said Tilton.
Single-family housing starts rose in December to a 470,000 annual pace from 450,000 the prior month and the highest since April 2010, the Commerce Department reported last week.
Homebuilders may not be the only industry benefitting.
Profits at Union Pacific Corp., the biggest U.S. railroad, topped estimates in the fourth quarter as carloads advanced 3 percent, led by gains in autos and chemicals.
Shipments of chemicals improved as “favorable weather and strong demand extended the shipping seasons,” John Koraleski, executive vice president of marketing and sales at Union Pacific, said on a Jan. 19 conference call.
While the seasonal adjustment may have augmented the improvement in growth, it does not cast doubt that growth has strengthened, said Tilton.
“The main driver is the fundamental state of the economy,” said Tilton. The drop in fuel prices in the second half of the year and the rebound in confidence from the “uncertainty shock” caused by the debt-ceiling debate have played a bigger role in the improvement, he said.
Institute for Supply Management