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Reality vs. Perception: The 3 Minute Mile

Tuesday, December 23, 2003 | 12:20 PM

I was quite the runner back in High School. My mile times were a little over 3 minutes. Indeed, I ran the marathon in just under an hour and a half. Now that I’m in my 40s, it takes me longer to finish the 26 mile run - a touch over two hours.

Still, those are pretty respectable numbers.

Of course, those are my seasonally adjusted, inflation bracketed, annualized numbers -- not my actual track times. I simply applied the same governmental methodologies used to calculate economic statistics to my lap times.

Take this morning’s revised GDP numbers, for example: 8.2% annualized GDP growth sure sounds impressive. But that number’s fictional. GDP growth for the 3rd Quarter was 2.05%, which is then multiplied by four to derive an annual number (4 Qs= 1 year).

GDP is no more 8.2% per year than I am a 3-minute miler.

What’s so amazing about these illusions is how the markets react to them. Each week, we get treated to seasonal adjustments, revised estimates, subsequent revisions to the revisions. There’s hedonic pricing (which, trust me, you really don’t want to know about). There are nominal numbers, inflation adjusted data, and on occasion, “real” numbers.

Then there’s the GDP deflator. No one I spoke with is able to explain to me what this does or how it works. (That includes Nobel Laureates). There is some complicated applied mathematics involved; NASA’s Jet Propulsion Laboratory had some engineers figure out how the deflator functions for their website (really). But no one else actually understands how this works. That should be a red flag that we have become overly reliant on estimates and false data.

But intelligent economists admonish us to understand the limitations of data, and place it into the framework of a larger perspective of trend. See the forest and the trees.

What should matter most to market watchers, however, are the changes in underlying trends and how they impact perception versus reality. Example: Before the 3rd Quarter, the general perception of the economy was that it was worse than it actually was. After the 8.2% GDP number came out, expectations got raised so high they overshot the reality. Now, the general perception is that the economy is much better than it actually is.

That gets reflected in the disappointment in holiday retail sales - despite the fact they are going to be the best in 3 years.

Reality trumped by perception once again.