A Mess of Misleading Indicators

Statistics are the heavenly bodies of economics. Not only are they used for navigation by businesses, policy planners and researchers but they also exert a powerful pull over the tides of the economy. A high monthly figure for the trade deficit, for example, can send floods of money rushing out of the stock market in a sell-off. The sheer quantity of statistics available is immense. Nearly every business day the U.S. Government releases one indicator or another, from the Consumer Price Index and capacity utilization to retail sales and housing starts. Too often, however, the overall impact of the numbers is to generate confusion and anxiety. Some of the statistics are subject to repeated revisions. Other gauges fluctuate so wildly from month to month that they seem almost useless. More and more, the art of economic planning appears to be degenerating from astral navigation to something closer to astrology.

The most recent example of statistics gone awry involved the gross national product, the broad measure of the country's output of goods and services. On April 26 the Commerce Department announced that the GNP grew at a moderate annual rate of 2.3% in the first quarter of 1988. Experts interpreted the figure as proof that the economy was running smoothly. A month later, Government statisticians boosted first-quarter GNP growth to 3.9%, a change of nearly 70%. Suddenly, investors had reason to fear that the economy was overheating and that inflation was in danger of accelerating.

The reason for the sharp revision was simple: the first GNP figure was based on incomplete information. The Government reports a quarter's GNP after data for only the first two months are available; the statisticians make educated guesses about what happened during the third month. In this instance, an unexpected surge in exports in March led to the radical change in the calculation of the growth rate.

Such dramatic revisions in the GNP, retail sales figures and other important statistics occur with maddening regularity. "The numbers are not bad," says Sidney Jones, professor of public policy at Georgetown University. "They are just premature." But the Government is under pressure from anxious investors and executives to report economic data as soon as possible. Observes Robert Ortner, the Commerce Department's Under Secretary for Economic Affairs: "If you want something quickly, you give up something." In this case, accuracy.

Some of the Government's economic compasses may be poorly constructed as well. The index of leading economic indicators, a compilation of statistics designed to predict the direction of the economy, is frequently derided as the "index of misleading economic indicators" because of its uneven forecasting record. After last October's stock-market crash, the index declined for three consecutive months -- normally a strong sign that a recession is on the way. An upward revision in the December figure, however, broke the downward streak, and fears of a recession evaporated.