When can you trust economic data?

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com, or follow me on Twitter.

Interesting:

The charge that employees at the BLS manipulated the employment numbers to favor Obama is nonsense as anyone familiar with the calculation of these numbers can attest, but it does bring up a good question. What factors should be considered when assessing the reliability of economic data?

The first thing to consider is how well a particular piece of data accords with what we are actually trying to measure. For example, the total output of goods and services in the economy is relatively easy to define in theory, but does our actual measure give us this information? In developing countries where there is substantial home production that does not get counted, GDP may be a highly misleading measure of total output. Similarly, going back to last Friday, does the unemployment rate adequately reflect the actual unemployment problem in the presence of factors such as discouraged workers and involuntary part-time employment?

Even if a particular piece of data is imperfect, e.g. a measure of total output that excludes significant amounts of home production, it can still provide useful information. A thermometer that is off by a constant, but unknown amount won’t be very helpful if the question is, “Precisely how hot or cold is it today?”

But if the question is about how the temperature is changing over time, whether it’s getting hotter or colder, and if the reading rises three degrees from one day to the next, that’s an accurate measure of the change. Similarly, GDP and unemployment may not be completely accurate reflections of the actual condition of the economy at any given point in time; but if the measurement errors are constant they can still give an accurate picture of whether the economy is doing better or worse relative to the past.
This brings up a second consideration. The usefulness of a particular piece of data depends upon the question being asked. For example, if the question is about the cost of living for a household, the personal consumption expenditures index (PCE) is the best measure we have. But if the question is about the underlying trend rate of inflation that households face, then core PCE – PCE minus food and energy – is a better choice.

Post external references

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    http://www.thefiscaltimes.com/Columns/2012/10/09/How-Much-Trust-Should-We-Have-in-Economic-Data.aspx#page1
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