Sometimes manipulated, more often expressing half-truths, and mostly misinterpreted: economic statistics are never an absolute truth.
GDP, inflation, unemployment... quarter by quarter, the market moves to the ups and downs of these figures, taken as gospel. Official figures are seldom questioned by economists and the media. Yet experts have shown that they can be manipulated, or in a majority of cases, they can express only half-truths. A half-truth is to say, on January 2015, that the Swiss franc’s 20% appreciation was harmful to exporters, and not to mention that all of Swiss imports were getting a 20% discount.
But more importantly, «macroeconomic indicators are much more ambiguous than is commonly realized», write Roberto Aragão and Lukas Linsi, two researchers from the universities of Amsterdam and Groningen. «Therefore, the line between accurate and manipulated data is more blurry than typical narratives about manipulation acknowledge». Their academic article, published in the «Review of International Political Economy», focuses on the specific ways in which official statistics get manipulated, using the cases of Greece’s public deficit figures, Argentina’s inflation statistics, and the Brazilian «fiscal pedaling» scandal.
Forms of manipulation were also observed with EU member-state statistics. Patterns of consecutive revisions show that initial data releases by national statistical offices tend to systematically underestimate final public debt figures. The size of the biases is generally modest, but the fact that political interference does occur with economic statistics has been shown by a fair amount of research.
Aragão and Linsi classify manipulation in four different categories. The first is outright manipulation, which is actually rare. More frequent is guesstimating a politically convenient figure when the actual number is unknown. Even more frequent is the adoption of changes in statistical methodologies that lead to more convenient numbers. In my personal view, the changes in computation methodologies for the U.S. inflation since the 90s and the 80s fall in this category: each time, they made consumer inflation look lower than it would have been using the previous method.
The fourth type cited by the study is «indicators management», or the employment of indirect means that lead to a more favorable (and methodologically correct) figure: a «creative-accounting» type of tweaking, as they call it. In all cases, the motivations to embellish figures are not difficult to see: «Governments want to present bullish statistics on the performance of the economy to their people and the world (such as high growth, low inflation, small deficit, etc.)», write the two Netherlands-based researchers quoted above. Three triggers can push for data «management»: the external imposition of hard targets (like the Maastricht criteria), the imminence of elections (I would cite here Trump’s vocal pressures on the Fed to accommodate the markets), and financial troubles (the Greek case).
«When dealing with economic statistics, we shouldn’t forget that the main responsibility rests in the hands of those who use and interpret those data», says Marie Owens Thomsen, chief economist of Indosuez Wealth Management in Geneva. The Swedish-born expert is known for her independent judgement. She never lets herself be pressured by external entities and never adopts consensus thinking without first carefully reviewing the numbers. She even regularly checks the figures published in media such as the Economist and doesn’t hesitate to signal errors wherever she spots them.
Commenting the data manipulation issue, she takes the Gross Domestic Product as an example. «It is the king of statistics. Yet it is often misinterpreted: people very often use this figure to convey much more than what it actually conveys. The GDP says less about the general state of an economy than is often assumed». It accounts only for transactions with a price tag on them, she says: it doesn’t measure the value of parental child care, or elderly care, or growing your own garden, neither does it account for undersea and underground resources.
«We have to be aware of what the GDP-numbers really say when we use them», she insists. In order to express a more accurate view of the state of an economy, she suggests adding other data to help complete the picture. The truth is, if one were to really make a wide assessment of a country’s economy, one should use several indicators of economic development, such as those used by the World Bank: and there are 140 indicators to analyze. «If we were to compare ten countries, it would complicate the task even more, and this naturally discourages many an analyst».
The same goes for inflation: people have to understand what the inflation basket is made of, says Marie Owens Thomsen, and not confer to this measure a meaning it doesn’t have. «There is not a single objective basket of goods. At every stage of the data production, choices are made. One has to know how a particular measure is created». Users of economic statistics must be aware of the limits in the information that some of these statistics contain, says Marie Owens Thomsen. «You have to use the right indicators regarding what you are looking for. If you look for an answer about financial asset inflation, the consumer price index is not the right indicator to answer this question».
She takes another example: Switzerland risks being labeled a «currency manipulator» by the US Treasury, partly because its current account surplus exceeds 3% of GDP. Switzerland is supposed to remedy this by appreciating its currency to make its exports less attractive and thus reduce the surplus. But «the most part of this current account surplus is actually made of repatriated profits from Switzerland’s foreign investments, mainly in the US, and these generate hundreds of thousands of US jobs», notes Marie Owens Thomsen. «I am sure that the Treasury wouldn’t want Switzerland to stop investing in the US in order to reduce its current account».
Brilliant Northern European minds stand out nowadays in independent economic analysis. The Swedish chief economist from Indosuez Wealth Management and the two Dutch researchers quoted above are particularly enlightening. I also follow a Finnish analyst on Twitter, Tuomas Malinen, who makes sharp analyses of central bank policies at his Helsinki-based firm Gns Economics. Similarly, Danish-born Steen Jakobsen, chief economist and CIO of Saxo Bank in Switzerland, offers a refreshingly independent view and knows how to steer from consensus when needed. A «Nordic objectivity», one might call it, that shines in the landscape and deserves a fine tribute.