Monday, February 15, 2010

How to be an economic genius

Step 1: Learn to read the data.

There is no step 2.

Barry Ritholtz, over at The Big Picture, found and posted this chart.

Click, read, learn.  The researcher here found clear correlation between Retail Sales, GDP, and unemployment.  If these locked trends continue then the only number you need to know anymore is the Retail Sales number.  That's one of the first numbers you will hear each season, so that's convenient.

But the really important data element here is the level of Retail Sales increase necessary to achieve increases in employment.  The chart is not indicating causation--increased Retail Sales does not cause employment.  In fact the inverse relationship seems more likely.  But the Retail Sales number is reported early and rarely adjusted, where the Unemployment Rate is reported late and often revised significantly several times.

This does not suggest that a sales tax holiday (or longer-term reduction) will lead to increased employment.  It only suggests that we won't see the unemployment rate start falling until after we see the Retail Sales sector of the economy post some improvements over 3.2%.

According to the US Economics & Statistics Administration, January 2010 saw a 4.7% increase in Retail Sales versus January 2009.  Some people are quite skeptical of these numbers, and the methodology employed to scrub the data.

If the chart is to be believed and the 4.7% increase number is accurate, then we should be looking at the unemployment rate dropping by about 3%.

The skeptics at Seeking Alpha say that the seasonal adjustment of the January 2010 data is inflating the number by 1.5%.  That would indicate that the real Retail Sales increase for January 2010 was 3.2%.  That would equate to an unemployment rate decrease of 0.1%.  My gut says that is a more accurate number.

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