The Economist: Things aren’t always what they seem…

I recently sent a congratulatory note to one of my favorite business reporters, Wayne Heilman at the Colorado Springs Gazette, for emphasizing an important point in an economic data release. Even though the unemployment rate increased 6.3 percent, almost 20,000 discouraged workers returned to work and more than 17,000 new jobs were created, reflecting optimism about the economy on the part of discouraged workers and employers, not that it caused unemployment to rise. Most business reporters — who should know better — missed this distinction, and so the general public missed it, too.

As the reported unemployment rate has trended down during the past 40 months, it hasn’t just been good news. Sometimes the rate declined because more people left the labor force than lost jobs; employment actually declined. Remember, you aren’t unemployed unless you are available for work and have actively looked for a job in the last four weeks. If you stop the search, you are no longer an unemployment statistic.

Another economic figure subject to confusion is income. A lot of attention has been paid to the 7 percent decline in median income during the Great Recession; less to the fact that federal tax cuts, food stamps and other in-kind transfers are ignored in census income data. The adjusted decline was only 4.1 percent and the earnings of male heads of household actually increased.

Something to keep in mind is that correlation isn’t necessarily causality; just because two things occur simultaneously, one doesn’t automatically cause the other. I was reminded of this rule when I read a recent article headlined “Medicare lobbying pays off.” It described how the 10 drug companies that make the most money from doctors who prescribed their products to Medicare patients spend tens of millions of dollars lobbying the federal government. Does one trigger the other? Maybe. One would expect the largest companies both to sell the most drugs and spend the most on lobbying.

An article by Zachary Karabell in Foreign Affairs points out that leading indicators released each month were created to measure the economies of industrial states in the mid-20th century and are not very useful for today’s service-producing and goods-exporting economies. 

Take into account the gross domestic product (GDP), which makes quarterly headlines and is used as a proxy for whether the economy is growing. We had what appeared to be bad news in the first quarter – GDP increased only 0.1 percent. But when we recall that the weather in much of the country during that time was atrocious, it’s no wonder consumers weren’t out shopping. Second-quarter statistics will likely be much stronger with catch-up spending. 

Other items worth noting: The GDP excludes domestic work, though many mothers would beg to differ. Production and consumption are treated as positives, regardless of why they occur. A steel mill producing pollution that requires expensive clean-up efforts contributes positively to GDP. Replacing my incandescent light bulbs with long-lasting LED bulbs is a negative. 

We need to be careful to read between and beyond the headlines of the latest economic releases and question what data really tells us. Maybe a class in economic statistics should be a graduation requirement.