By BoLOBOOLNE payday loans

Some feedback to Financial Reporters

I’m sure you know the US economy is in recession, which means the total amount of economic activity is declining.  Last week you might have heard the official numbers on how fast it’s declining.  The big story was that the economy is down 6.2%, and everybody agrees that’s a lot.  Most everybody agrees on what it was that shrank — the GDP, or Gross Domestic Product, which is a strictly defined measure that attempts to sum up all economic activity within the country’s borders.  But subtle differences in wording make it really unclear on actually how fast the economy was shrinking.  For example, consider these statements:

  • Gross Domestic Product shrank 6.2% in the fourth quarter of 2008. [Marketplace] [similar in Reuters]
  • Gross domestic product shrank at a 6.2 percent annual pace from October through December [Bloomberg]
These statements mean very different things.  If the economy was actually 6.2% smaller at the end of December compared to the beginning of december, that is equivalent to an annual pace 22.6%.  (You might think it’d be 24.8% = 6.2% * 4, but actually it’s 100*(1-(1-6.2/100)^4) — just like compound interest.  If it shrank in half twice, it would be a quarter, not zero.)
So is it 6.2% change in a quarter or a 6.2% annual rate?  Knowing which one is correct requires enough background in the topic at hand to know what’s reasonable.  An annual decline of 22.6% in GDP is unheard of for a first world economy, so they must mean a 6.2% pace.  Fortunately our intuitions work for macroeconomic terms we’re familiar with like US GDP.  But when the same reporters talk about other numbers like housing prices or oil prices or an individual stock, these statements really are ambiguous for most of us.
I’m calling out to all the reporters in the world, especially financial reporters.  When you read a number with the word “rate” or “pace” next to it, and you re-report this number, leave the word “rate” or “pace” on it! Unless you really know what you’re talk about of course, but if you’re not busting out a calculator, you can’t just drop that word and have the right answer.  That word is a unit like miles or kilometers. A 6.2% annual pace means 6.2% change over 12 months, and if you imply that same change happened over a quarter or a month, you’ve made a mistake as bad as changing pounds to ounces.  </rant>
The quotes I chose are from presumably reputable financial news sources.  You don’t have to venture far at all into mainstream media to find these numbers getting butchered.  (See LA TimesHerald.)  The Reuters quote is possibly excusable in that it’s refering to something you presumably already know, rather than reporting the fact directly, which you might claim to be jargon since everybody reading Reuters knows the economy couldn’t shrink 6% in three months.  Marketplace just screwewd up — they were clearly reporting the number as news, and should know better as they try to address a broader audience and educate them about financial issues.  I call them out because I like them, even though they make this mistake a lot.  Maybe they’ll read my feedback on the air.

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