Over the last few months, several clients have asked me about economic news headlines in the media. Two of the most commonly reported on data points in the press are real GDP growth and jobs reports. But the data is open to interpretation. Reporters can pick and choose what number (and version of that number) they want to report to spin it depending on the narrative they want to push (whether positive or negative). So it’s best to ignore pretty much all economic news you hear. My advice is to try to not let the news media influence you with their fear-mongering on the negative side or their mania-inducing on the positive side. Either way, it just increases anxiety or makes you overly optimistic when even many professional economists have no idea what they’re talking about.
Markets Are Anticipation Machines
First of all, nothing widely disseminated by the media is going to have much bearing on investing. That would just be too easy. How could the market not immediately factor that information into prices? The only data points that are likely to predict economic output or market movements are those that are a little less obvious.
GDP Growth Is A Pretty Much Useless Data Point for Investors
Let’s address GDP growth first. When you see that number in the news, what exactly does it mean? Last quarter’s estimate originally came in at 1.6% (later revised down to 1.3% then to 1.4%). This led to talk of a recession or slowdown. But does that number mean the economy grew 1.6% over the last 12 months? No, that would make too much sense! Instead, they take the most recent quarterly growth number and imagine it repeats for four straight quarters. In fact, over the last year, real GDP grew 2.9%. That’s above-trend and doesn’t sound bad at all!
Now, a recession may be on the horizon, and in our investment outlook we discuss that, but it’s not because of whatever the economy did last quarter. Recent economic growth has very little predictive power at all for the future of the economy or market performance. GDP growth is often positive or even decently strong right before a recession (see the post to the right from an analyst at BCA Research). And GDP growth was negative for a couple of quarters in 2022 without a recession! GDP growth as a variable doesn’t even factor into Hesperian’s investment process at all.
Just a reminder: Strong growth today is no guarantee that a recession is not imminent. The US economy grew by 2.5% in in the fourth quarter of 2007, just as the Great Recession was beginning. pic.twitter.com/lNs4XMzYVe
— Peter Berezin (@PeterBerezinBCA) June 19, 2024
Jobs Reports Aren't Very Helpful Either
Hesperian also doesn’t really look at jobs reports. When a supposedly strong May jobs report came out (in June), the media seemed to forget all about any fears over GDP growth from the first quarter. But here’s why you’ve got to take the reported numbers with a grain of salt.
There are two different jobs surveys. Last month, the survey of businesses estimated 272,000 jobs were created, while the survey of households estimated 408,000 jobs were LOST. That’s a big difference! Which one is right? And these surveys have sizable margins of error and are subject to later revisions (which the media rarely makes a big deal out of). Even how they define a job is strange. A part-time job is counted as a “job”. If you dig into recent reports, a large proportion of the job gains have been part-time, which doesn’t sound like an indicator of economic strength.
Companies usually hold off on layoffs as long as they possibly can anyway. So job losses don’t really accelerate until we’re already in a recession (see the chart above). If you wait to see job losses to adjust your portfolio, it’s often too late.
What Economic Data Is Important?
In terms of economic growth, I don’t look at recent GDP growth itself but variables that tend to predict future changes in economic output, notably indexes of leading economic indicators, changes in the yield curve, or housing starts.
For the labor market, I don’t look at job growth, but rather at things like hours worked, because employers tend to cut hours first before they lay off employees. I do look at changes in the unemployment rate, which is based on the Household jobs survey. But the unemployment rate tends to be very low still at the start of a recession and only progressively increases throughout an economic downturn. So even a very small increase from a cycle low is enough to raise recession concerns, something many economists and investors might dismiss as noise. And the unemployment rate is rising by the way—in a similar manner as it has before previous recessions.
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Is high GDP growth good or bad? Depends. I could increase GDP by maxing out my credit cards and buying a whole bunch more stuff next month. Is that a sign of economic strength or an indication that I might be a desperate consumer struggling to maintain my lifestyle who’s been forced to take on the worst kind of debt to do so? GDP doesn’t take into account whether spending is funded from income (sustainable) or an increase in debt (unsustainable and dangerous).
By the time lagged data reports from the government convince you we are in the midst of a sustained economic downturn, it’s usually too late to act in your portfolio. Stock markets may already be down double digits. You may have already missed on fantastic bond returns as interest rates fell. That why I totally ignore GDP and look instead at leading indicators with a proven track record of forecasting economic activity and a sound, supporting theory for why they do so (I’ll highlight a few things I do consider at the end of the article).
Turning to jobs reports, similar issues apply, except there are probably even more measurement issues. Here’s why you’ve got to take the reported numbers with a grain of salt sometimes:
- Different job surveys can provide radically different results. Last month’s Establishment Survey estimated 272,000 jobs were created, while the Household Survey estimated that 408,000 jobs were LOST. That’s a big difference! There is a hard data job census (though it’s not widely known because it comes out several quarters late) and it also can contradict the more popular surveys. It showed 192,000 jobs were lost in the third quarter of last year when the jobs surveys showed strong job growth.
- The jobs numbers also get revised, sometimes substantially, although the adjustments are rarely reported on. And unfortunately, they tend to overstate jobs around a recession giving economic forecasters overly rosy information exactly when they need as much forewarning as possible.
- If someone is struggling to find a single full-time job and takes on three part-time jobs in desperation, they would show up three times on the report and pad the numbers when actually the labor market is distressed.