Mish's Global Economic Trend Analysis

Quarterly GDP Consensus Estimates vs. Actual GDP 2009 to Present
$1.2 Billion Obamacare Contract Pays Workers to Do Nothing
Ukraine in "Undeclared War" with Russia says Defense Minister; Mish says "Russia Won't Invade"

Quarterly GDP Consensus Estimates vs. Actual GDP 2009 to Present

Posted: 13 May 2014 08:56 PM PDT

I received an interesting chart today from Ralph Dillon at Global Financial Data in regards to GDP consensus estimates.

GDP Consensus Estimates vs. Actual GDP

click on chart for sharper image

Dillon writes ...

I am by no means advocating that it is an easy task trying to predict what the economy will do in the next quarter or over a fiscal year, but when the forecasts compared to reality are so wrong time and time again, why do we place so much emphasis on forward looking data that is just flat out incorrect?

Over the last several years, I have followed and made notes of everything related to GDP because I am constantly perplexed as to how a broad range of economist (consensus) are constantly cutting and revising GDP estimates. For instance, just last Friday Goldman Sachs hiked Q2 GDP to 3.9%. This is on the heels of an awful Q1 that was blamed on everything from weather, deteriorating economic environment or even just a flat out surprise and getting caught flat footed. This morning, 2 business days later, they revised their Q2 GDP estimate to 3.5%. What changed in the last 2 days that would warrant a higher revision and then ultimately a lower one to 3.5%. If it's going to be wrong, then why not just stick with your original estimate and not continue to move the bar up and down?

Let's take a look at the last 21 quarters to help illustrate my point. After looking at all of the consensus estimates and comparing them to reality, I found that every single quarter has been wrong. Not saying that one or two economists didn't get it right, but overall consensus has been flat out wrong! 21 quarters and 0-21. These are terrible statistics by any measure. In addition, the average miss in either direction has been $1.25 Billion dollars. All things considered, that is a huge miss from a percentage standpoint. I can't help but think that perhaps a better way to forecast GDP going forward is to throw darts at GDP estimates on a dart board. If you recall from the internet bubble days, that was more accurate and successful way to pick stocks than most portfolio managers had at actively picking individual stocks. If that proves to be more successful than the current track record, then perhaps we should use that for forecasting. My point being, is that it can't be any worse than 0-21 over the last 5 years.

How do you interpret the data? When they use terms like "probably, solid bounce back, grow strongly, gradually improve and distorted by one off numbers", you would think that they are speaking with conviction to what they believe. But in reality, they are just words meant to reassure the investing public that all is good in the investment world when in fact that may not be entirely accurate. In the late 1990's, Painewebber's Chief Strategist Ed Kirschner wrote quite a bit about thematic investing. One of the things he spoke about often was all the revisions that take place on Wall Street with everything from GDP, earnings, employment to economic statistics. For every estimate, there was a revision. For every earnings report, there was a restatement. I recall him saying over and over again in his presentation, " does anybody really know what time it is?". Some 15 years later, I am afraid that no one still does.

Questions Abound

Given that government spending adds to GDP by definition, How much of GDP is deficit financing of demand brought forward?

How much of GDP is in any way productive?

For the answer to the latter question, think about things like bombing Iraq and Afghanistan to smithereens. Also think about government contracts that pay people for doing nothing.

For a recent example of the latter, please see $1.2 Billion Obamacare Contract Pays Workers to Do Nothing.

If the government paid people to spit at the moon it would add to GDP by definition. Yet, paying people to spit at the moon makes as much sense as paying people to do nothing.

Worse yet, spitting at the moon actually makes more economic sense than many of the needless destructive wars we fought. Deficit spending and stupid wars realistically ought to subtract from GDP.

And what about hedonic pricing and imputations?

For those not familiar with hedonic pricing, the government accounts for the presumed value of goods sold, not actual prices. For example the prices of computers drop every year even though speed and memory increase continually. Rather than calculating the actual price of goods sold, the government adjusts prices to say computers sold for more than they really did.

Here's an example of imputations: The government adds the "imputed" value of free checking accounts to GDP as a valuable service rendered but not paid for.

I propose that makes as much sense as imputing the value of free sex rendered to married husbands on the grounds that if they weren't married, they may be paying prostitutes.

Yet nearly all economists focus on GDP as the be all and end all in economic measurements.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

$1.2 Billion Obamacare Contract Pays Workers to Do Nothing

Posted: 13 May 2014 12:23 PM PDT

Check out this video of Obamacare contractors paid to do nothing, literally.

Link if video does not play: Paid to Do Nothing

An employee of Serco, a company with a $1.2 billion government contract to handle paper healthcare applications has some rather interesting, and believable claims.

"There are some weeks that a data entry person would not process an application. The main thing is the data entry side does not have hardly any work to do. They're told to sit at their computers and hit the refresh button no more than every 10 minutes. They're monitored, to hopefully look for an application. Their goals are to process 2 applications a month, and some people are not even able to do that. There are centers in Missouri, Kentucky, and Oklahoma. 1,800 people trying to get 1 of 30 application that pop up. Serco, gets paid for the number of people they employ. So they want us there even if we are not doing anything."

Others complain as well. The video shows online comments from an alleged former employee "This place is a JOKE! There is nothing to do - NO WORK."

Serco refused to answer questions about the news investigation.

The center for Medicare and Medicaid issued this preposterous statement: "Serco is committed to making sure federal funds are spent appropriately."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Ukraine in "Undeclared War" with Russia says Defense Minister; Mish says "Russia Won't Invade"

Posted: 13 May 2014 10:44 AM PDT

The civil war in Ukraine took a bloody turn for the worse today as separatists killed six Ukrainian soldiers and wounded eight others in an ambush near Kramatorsk in the Donetsk region.

In response to the ambush, the Ukrainian defense minister proclaimed Ukraine in "Undeclared War" With Russia.

"In our eastern regions we have an undeclared war," acting Defense Minister Mykhaylo Koval told reporters in Kiev today. "Our neighboring country unleashed the war, sending special forces and saboteurs into our territory."

If Donetsk and Luhansk secede, Ukraine would lose about a fifth of its economic output, Bank of America analyst Vadim Khramov wrote in an e-mailed report today. As for Russia, the tension may cost it $115 billion, or about 3 percent of annual output, and exacerbate recessionary pressure, said Nariman Behravesh, chief economist at consultancy IHS Inc. (IHS), said in an e-mail today.

"While Russia could end up paying a very heavy economic price for its annexation of Crimea and its ongoing conflict with Ukraine, the negative impacts on other parts of the world, notably Europe, will also be hard to avoid," Behravesh said.

A majority of Ukrainians, or 56 percent, believe their country is at war with Russia, according to a poll by the Kiev-based Razumkov Center published today.

About 53 percent want to join the EU -- ousted President Viktor Yanukovych's refusal to sign an EU association agreement triggered the crisis -- whereas two thirds see Russia as "brotherly" and "friendly" according to the April 25-29 poll of 2,012 people. It had a margin of error of three percentage points.

Rather Curious Poll

56% say Ukraine is at war with Russia but 67% say Russia is brotherly and friendly. That does not make a lot of sense. I would like to see the poll questions.

Official Denial

The defense minister's statement regarding an undeclared war with Russia sounds curiously like an official denial of Civil War. Ukraine does not want to admit the truth.

Renewed Diplomatic Push in Ukraine

The Financial Times reports Renewed Diplomatic Push in Ukraine Crisis

A new diplomatic push to resolve the crisis in Ukraine is under way even after two of its regions declared independence and sought to join Russia, with European mediators pushing for "round table" reconciliation talks.

German foreign minister Frank-Walter Steinmeier, spearheading the diplomatic initiative, flew into Ukraine on Tuesday on a visit aimed at narrowing the gap between the interim government and pro-Russia separatists in the east.

Berlin has played a central role in promoting a mediating role for the Organisation for Security and Co-operation in Europe, and its current chairman, Swiss president Didier Burkhalter – and securing backing from Moscow for the idea.

The OSCE road map includes a ceasefire by all sides, disarming illegally armed groups, a "national dialogue" on constitutional reforms, and holding free and fair presidential elections across the country on May 25 as planned.

Another Failure Likely ... Unless

The new OSCE road map is identical to the old OSCE road map. Thus, these new talks are likely to fail unless the separatists are at the table. Unfortunately, Kiev does want separatist leaders at the table, just as before.

Holding Russia responsible for a group it has no direct control over seems ludicrous, yet that is about to happen, again. And if the talks fail, more counterproductive sanctions will be on the way.

Why Russia Won't Invade

Long-term, I am optimistic. Somewhere along the line, I expect all parties will sit at the table and talk. A neutral Ukraine, with more autonomy for Eastern and Southern Ukraine is the most likely result.

Russia will retain Crimea.

Behravesh commented "Russia could end up paying a very heavy economic price for its annexation of Crimea ..." I rather doubt it.

Winning Crimea was a long-term strategic victory, and repercussions will blow away within a year.

If Russia attempts a takeover of other regions, which I still doubt, then there could be a heavy price.

And although the recent vote for independence suggests otherwise, other polls have shown majority of the citizens in Donetsk prefer an association of some sort with Kiev.

Unlike Crimea, there is little reward for Russian annexation of other areas. Feuds and sanctions would simmer for years.

Why would Russia want that? I suggest Russia doesn't, and that is why it hasn't (and won't) invade Eastern or Southern Ukraine.

Ultimately, diplomacy will succeed. In the meantime, civil war, not a war with Russia, lingers on.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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