ECRI Says Economic Data Has Too Much Seasoning

The Economic Cycle Research Institute is continuing to stand by its recession call, and now contends that a reason for the recent improvement in U.S. economic data is a problem with the way seasonal adjustments are made.

In a press release on its web site, ECRI says that recent data is worse than many believe. “In contrast to the 3% GDP growth widely reported for the latest quarter, year-over-year growth in GDP, after peaking at 3½% in Q3/2010, has basically flatlined around 1½% for the last three quarters,” the group says. “Broad sales growth has followed a similar pattern, while the growth rates of personal income and industrial production have dropped to their lowest readings since the spring of 2010.”

ECRI is focusing a good deal on year-over-year data, not data from successive quarters. The reason: “Most data, both public and private, are seasonally adjusted. But the nature of the Great Recession seems to have had an unexpected impact on the statistical seasonal adjustment algorithms that are hard-wired to detect when the seasonal patterns evolve and change over the years. This is normally a good thing, but when the economy fell off a cliff in Q4/2008 and Q1/2009, it was partly interpreted by these procedures as a lasting change in seasonal patterns. So, according to these programs, data from Q4 and Q1 would be expected thereafter to be relatively weak, and therefore automatically adjusted upwards. Our due diligence on this subject indicates a widespread problem, resulting in many recent economic headlines being skewed to the upside.”

ECRI says that the bottom line is that despite “unprecedented, concerted global monetary policy action”, policymakers have been unable to “repeal the business cycle”.