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Quick Book Review: The First 40 Pages of The Secrets of Economic Indicators by Bernard Baumohl

After two hours of reading The Secrets of Economic Indicators, I must regrettably write an excoriating and punishing initial review of this book. But before my tone and goals are misunderstood, you should know that I highly recommend that you read and study this book, at least up to page 40. Dollar for dollar, there is no better introduction to the current beliefs and attitudes about the use and utlity of economic data. If you ever wanted to understand why bond traders rip out limbs out when the jobs report is poor, read this book.

Frankly, it's not Baumohl's fault that his book inspires no confidence in me, and left me baffled about exactly how I should incorporate economic data into my decisions. In many ways, the entire subject of economic indicators is stale and corrupt, almost beyond redemption, built on fundamentals that are shaky, and yielding doubtful nonsense. But that's life, so let's get on with it.

First off, Mr. Baumohl sparkles in prose, with a readability second to none; the man can write. He chucks overboard tons of refuse, but his remaining cargo is infested by rats. He piles through indicator after indicator, talking about importance, construction methods, where to find the important stuff online, revisions, and a release's impacts on bond, stock, and international money markets. And he makes it easy to follow

But for me, the real moral value of Mr. Baumohl's tale is to confirm for the reader that he does not need to bother with data; in fact, instead of worrying about last quarter's GDP of the U.S., Germany, or Japan, the reader should be traveling there to experience those economies first-hand. This is because 1) the data don't actually represent much that is enjoyable about an economy--you don't learn about skyscrapers by looking at construction data--and more importantly 2) other people--investors and economists--are no doubt quicker and better at using this data than you will ever be.

Don't be worried that the book informs its readers about how people use macroeconomic theory to digest macroeconomic data, regardless of the quality of either. That's how it works. Accept it.

Remarkably, Baumohl invites readers to ignore the experts--like those that advised the mal-investments leading to the .com bubble--if they'll do the dirty work themselves. He wants readers to know that out of the seeming infinity of data availale, some indicators "have established a track record for being able to predict how the economy will behave during the next 12 months" (xix). He compiles sources for U.S. and international data, although Statistics Canada might be justifiably annoyed at this judgment that "No country collects and disseminates as much high-quality economic information as the U.S. Its breadth and integrity make it the gold standard in the world." That's true but misleading, as in the judgment of other statisticians, Statistics Canada ranks higher than the U.S. in terms of data quality, and Australia might come in a close second.

The first chapter (available free online, see Mahalanobis) begins with a cute story of the process of data embargo, with journalists given the data at 8AM, and a release to the public at 8:30AM. Traders, who have already in essence, placed bets on the outcome, react to the news. So do policymakers. Sometimes, when the numbers come in far from forecasts, hilarity ensues...

What really got under my skin is that Baumohl conflates the actual history of economic activity with the collection and dissemination of that data:

All will eventually feel the fallout from the news that came from the Labor Department's press room that morning. That fallout will produce a mixture of both favorable and unfavorable developments. (6)

That release was a compression of history into a single figure. Will economic actors in the future be responding to the complexity of activity behind that figure, or to the figure itself? Perhaps it doesn't matter, but I ask what would happen if the BLS and BEA shut down tomorrow? Would economic actors no longer respond to the economy because it wasn't contained in official news reports?

Also, Baumohl notes that the reactions to this single release are not permanent. They will be modified in a fundamental way by future releases. In the story, predictions that a release of X will have some short-run effect are made without reference to tomorrow's release, which will once again change future plans. Hence, all this talk about impact on markets is intended to explain short-run movements, most of which amateurs would lose money on, if they were to try to time their investments.

The book is a solid introduction to domestic and international economic data, though it is an introduction. Most honorable is Baumohl's emphasis on the impact data release have on the interconnection of markets, and the ever rising importance of international trade.

However, the most terrifying aspect of this book is that there are no footnotes, no endnotes, no documentation, and no sources. The index is feeble. I am expected to trust Baumohl that the first of the "economic indicators most sensitive to stocks" is the payroll survey. Sorry, but I like looking at original research...

One paragraph was absolutely infuriating:

Of course, to many investors, it makes little difference whether the intial data is realible. They'll trade on these numbers anyway because the figures represent the very latest information they can get on the economy. Later, though, as more information is received and after statisticians have had a chance to review their computations, the preliminary figures undergo one or more revisions. Though revisions to earlier data are also read by investors, they generally do not spark much trading because by then the information refers to a time period that has long since passed. Investors usually focus on the future, not the past. Economists, however, take revisions more seriously because the new figures can affect their forecasts of economic activity.(21)

OK, let's figure out how bad data are useful to investors, but late data aren't. 1) All data are about the past. Do data about the past matter or not? Of course, but only the really, really recent past??? 2) If the data are not reliable at all, then they do not contain information, they contain misinformation, and should be disregarded. But they are regarded well, so they contain some useful information about the past. But revisions contain even more information about the past. Why is it that a past that is probably an additional month ("long since"???) or so older is no longer relevant. Isn't this quite arbitrary? What would happen if data were revised the next day???


Perhaps investors react because they expect others to.

Posted at January 25, 2005 04:15 PM

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