What numbers actually mean

If you are trying to follow what is going on with the economy, probably the least helpful thing is a number you don’t understand. For example, on Friday it was announced that GDP for the fourth quarter of 2008 had fallen by 3.8%—bad, but not nearly as bad as the 5% that had been expected.

Now, I’ve followed that particular number long enough to know that it isn’t very solid. For one thing, the ‘expected’ number is the average of numbers obtained from surveying a collection of economists, whose guesses this time around ranged between 3% and 6%. And the 3.8% is only a provisional number; if you look back (which people usually don’t do), you’ll see that most of the announced GDP numbers have been adjusted downward after about three months. (Because the data gets better over time, somehow? I don’t know.)

But here’s what I didn’t know about Friday’s GDP number, as explained by The Economist magazine:

IT IS a measure of the prevailing gloom that the worst economic performance in 26 years could still be described as better than expected. Real gross domestic product fell at an annual rate of 3.8% in the fourth quarter, below the decline of 5% or more that many economists had anticipated.

However, there is precious little reason for optimism. Almost all the unexpected growth came from a small rise in business inventories. This is almost certainly because firms did not reduce production quickly enough to keep pace with slumping orders. To get inventories back in line, more production cuts in the current quarter are likely. Morgan Stanley had expected GDP to fall by 4.5% in the current quarter, but now thinks it will fall by 5.5%. [Emphasis added]

So, it turns out that what seemed to mean “not as bad as expected” ends up meaning “worse than expected.”

I don’t bring this up to increase the doom and gloom, but just to remind myself that it is pointless to beat folks over the head with numbers I don’t understand. It could have just as easily gone the other way, a “worse than expected” number that actually meant that things are getting better.

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