WASHINGTON Markets have been whipsawed by government reports of economic data in recent months, often unnecessarily, because investors may not understand the meaning of these statistics, according to economists.
A report this month that producer prices were higher than expected in January sent the Dow Jones Industrial Average tumbling, a drop that continued after a survey of consumer attitudes showed that confidence had fallen to a seven-year low.
To investors, the first number meant that faster inflation would keep the Federal Reserve from cutting interest rates further and the second seemed to show that growth would slow some more. Such reactions frustrate economists, who pointed out that producer prices dont necessarily translate into higher consumer prices and that peoples reactions to the headlines can distort the confidence figures.
This is a chronic disease based on the belief that everything means something, said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, N.Y.
For example, economists say that the tone of news coverage affects the consumer confidence numbers. If the headlines are downbeat, consumers tend to say theyre less confident, even if their own situation is fine, the economists say.
The University of Michigan reported that its confidence index fell to 87.8 this month after weeks of headlines about slowing growth and Fed rate cuts. President Bush has been worrying aloud about the possibility of a recession, and the major news magazines touted job-loss fears on their covers. Yet unemployment, at 4.2%, remains just a few tenths of a point above a three-decade low. These headlines are news, but they do not accurately reflect what is going on in the whole economy, said Kenneth Mayland of Clear View Economics LLC in Pepper Pike, Ohio.
Economists develop their own lists of likes and dislikes in the steady stream of economic data, but almost all of them reserve special invective for two numbers: the corporate layoff tally produced by the Chicago outplacement firm Challenger, Gray & Christmas and the Conference Boards index of leading economic indicators.
Because it lumps together layoffs in this country and abroad and counts layoffs scheduled to be spread over several years as a single months number, I dont even consider Challenger an economic indicator, said Diane Swonk, chief economist at Bank One Corp. in Chicago.
And for the most part the leading economic indicators index repackages previously released data that purport to predict the economys direction, she said, yet it has predicted more recessions than have ever occurred.
Michael Englund, chief economist at Standard & Poors, called the index a poor indicator, Ms. Swonk said.