Wednesday, January 19, 2011

Statistical Paradox

The Lehmann Letter (SM)

This morning's Census Bureau housing report illustrates why economic forecasting is not easy:

Building permits leapt upward to their highest level in nine months while housing starts fell to their lowest level since WWII.

New building permits indicate construction projects that are about to commence. The problem is: Some projects will not start and will eventually be abandoned.

That's why housing starts are a better indicator of what will actually happen.

Truth be told: They move together over the cycle.

Housing Starts
(Click on chart to enlarge.)

Recessions shaded

That said, this morning's report that 635,000 building permits were issued in December is very good news. Let's hope they bear fruit.

Compare that with the report that said 529,000 housing units were started in December.

The chart puts this wide disparity in context. If building permits are an omen, that would be a great sign that an upward trend has begun.

But when your mind’s eye places 529,000 on the chart, it's hard to paint a happy face.

These are paradoxical reports. Forecasting is a tough business. We can only hope for the best.

(The chart was taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2011 Michael B. Lehmann

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