Lies and Statistics
Research for Online Investors

by John Dalt

3/28/11

Personal Income numbers this morning rose less for February than expected, but Personal Spending increased more.  What does it mean?  Is the consumer back?  This was the eighth month of spending increases.  Most of the added spending appears to be in food and energy.  According to the Commerce Department, spending adjusted for inflation was up just 0.3% rather than the 0.7% reported number.

One could think that spending is all the same as it signals the consumer is gaining confidence.  All consumer spending is not equal.  Higher food and fuel prices ‘steal’ money from other consumer discretionary purchases.  There will be fewer TV’s, computers, and iPads sold if the necessities require more of the consumer’s budget.  Reuters reports that spending growth increasing faster than incomes, resulted in national savings falling to $676.7 billion in February from $710.5 billion in January.

New York Fed President William Dudley spoke in New York on March 11, and tried to make the argument that inflation is not as bad as some would make it seem.  His point was that while food and fuel prices were higher, “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful.  You have to look at the prices of all things.”  Someone in the audience stated the obvious, “I can’t eat an iPad.”

The Consumer Price Index (CPI) in February recorded food price inflation at 2.8% and the gasoline cost increase at 19.2%  The CPI was 2.1% but many economists consider ‘real’ inflation is closer to 8%, or higher.  How can that be?

We have to go back to the statement made by Fed President Dudley.  The iPad 2 costs the same as the iPad 1, but is more powerful.  In Washington, this means there as actually been deflation, because you are getting more for your money!

The ‘official’ numbers don’t deal well with raw materials, because they are not easily manipulated with these kind of statistical calisthenics.  When the government requires car manufacturers to include a five mile per hour bumper and airbags on every car sold, it may increase the cost of the automobile $2000 retail.  That increase is not considered inflationary, because you are getting a ‘better’ car for the higher price.

Today’s CPI is more of a ‘Cost of Living’ index rather than a ‘price index.’ In the early 1980’s, housing prices were replaced with ‘owners’ equivalent rent.’ In other words, what would a homeowner pay in rent for the same housing? In the mid 1990’s, the Senate Finance Committee appointed the Boskin Commission to recommend changes in the consumption basket of goods the CPI attempts to track. The changes allowed for substitution of new consumer products. As technology changes the typewriter is replaced by the desktop computer then the laptop.  The purchase price may stay the same, but the VALUE to the consumer is so much higher it suppresses inflation numbers.

Steel prices, copper, food and fuel may go up in cost over the years, but the argument is that the consumer has not suffered from inflation because of all the new gizmo’s he can buy at lower prices.  To your editor it seems an intentional confusion between raw cost inflation and increasing productivity that supplies competitive prices on finished consumer items.

As investors, we need to understand the difference between lies, damn lies and statistics.  Generally, traders are more concerned with how an economic report matched market expectations.  This is a game of trying to anticipate short term winners and losers.  As investors, we must look for the long term implications , not of the numbers, but the actual trends that underlie the statistics.

Quote:
Claiming budget savings by freezing spending at today’s levels is like an alcoholic who says he’s sober because he’ll never drink more than yesterday’s bender. Trouble is, this alcoholic doesn’t even pay his own tab.---Economist Brian Wesbury

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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