History is subject to constant revisions, some for the better, some not so beneficial. Economic history is no different. You see, rewriting history, especially when it involves economic statistics is more commonplace than most investors would believe.
As numerous research articles attest, the data as first reported may bear little resemblance to the final entry in the history books—that is, if it isn’t revised again. By now, the challenges of using continually revised statistical sets in analysis and prognostication are well documented. But another less well known consideration has some important implications for those suggesting the U.S. economy is today displaying economic signs that in years past presaged a recession.
Statistical systems in the United States, both public and private, are nothing short of world class and, indeed, in many respects set the world standard. However, recognizing the need for a more accurate measuring system, the U.S. Census Bureau conducted open forums from 1994 to 1996 to discuss the plans, concepts and revision proposals for a new measuring system titled the North American Industry Classification Systems or NAICS (pronounced
‘nakes’). First published in the Federal Register in 1998, the new system of 20 divisions and 1,170 sub-sectors was very different from the 10 major divisions and 812 subsections used by its predecessor, the Standard Industry Classification (SIC).
And for good reason. Established in the 1930s, the old SIC classification systems lumped semiconductors in with Christmas tree lights and computers in the catchall category of industrial machinery, instruments and electrical equipment, since computers were nothing more than adding machines with electricity at the time of SIC’s inception. Little or no distinction existed between the services provided by a healthcare provider and a software programmer.
By the final transition date in 2004, 358 new industries were added, 390 old SIC industries were revised and 422 remained substantially unchanged. Additionally, new codes reflected the realities of the North American Free Trade Agreement (NAFTA) as Canada, Mexico and the United States formed one contiguous economic zone.
Importantly, the Census Bureau designated the NAICS’ reclassification as a “clean slate” revision. In a sense, economic history, as tracked by official government statistics, started over. And the start date was 1992. In other words, economic fact prior to 1992 may indeed be economic fiction.
Granted, to the best of my knowledge, a thorough evaluation of the transitioned data by reporting government agencies did not unearth glaring inconsistencies. Nevertheless, history was rewritten. All of which, I believe, is a critical piece of information, especially for investors focusing on points of economic inflection for use in forecasting impending recessions. You see, not only did all government databases default to 1992 for accuracy, but the U.S. economy has had only one recession (March-November 2001) within the clean slate data set. Therefore, while economic history may be informative and should not be ignored, I suggest it ill-advised to accept it as proven fact.
Investors keenly understand that past investment returns are no indication of future outcomes. Might I suggest to those relying on revised government statistics a similar caveat: past is not prologue.
This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its
accuracy. The forecasts and opinions in this piece are not necessarily those of Van Kampen, and may not actually come to pass. Information
in this report does not pertain to any Van Kampen product and is not a solicitation for any product.
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