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Watching CNBC or reading the business section of the Wall Street Journal leaves one marveling at the wondrous ability of federal bureaucrats to scrutinize – down to the millionth decimal place – everything from the percentage change in the price of bread in Topeka to the number of durable pieces of machinery manufactured in July. Ah … if only the philosophers of an earlier time had known these marvelous techniques – they surely would have been able to accurately calculate the number of angels who could dance on the head of a pin!

Precision, you understand is important, because without it the Federal Reserve could not “fine-tune” the economy, trusting in the gargantuan brains of Chairman Alan Greenspan and his posse to wisely use the tools of monetary policy in order to outwit the Invisible Hand of the ostensibly free markets. And without such Keynesian fine-tuning, we would presumably otherwise be living in caves, or worse – never mind the centuries of economic growth and technological development that took place prior to the creation of the Federal Reserve in 1913.

Still, I know economics can seem boring – hence “the dismal science” appellation. So, if this column is putting you to sleep like an unwanted pound puppy, please feel free to depart for the esteemed and doubtless more interesting scribblings of Mr. Medved, Ms. Simpson or, ladies and gentlemen, Mr. Joseph Farah!

Still here? OK, let’s rock. You may recall that one of the reasons the market gave up most of its 444-point gain from a week ago was the news that economic growth for the second quarter was worse than expected. Instead of continuing to hum along at the extraordinarily healthy rate of the 6.1 percent reported for the first three months of the year, the economy grew only 1.1 percent from April through June. Bad news and a big decline, but at least the economy is still moving forward right?

Wrong.

The problem is that the GDP numbers being reported are less accurate than Tony “INT” Banks. The Austrian economist F. A. von Hayek pointed out the impossibility of gathering the accurate economic data required for socialist calculation more than 50 years ago, and his contentions tend to be supported by a look at the numbers used by the Grand Masters of the Universe themselves. Here is a chart containing the official GDP numbers reported on July 31, 2002:





































QUARTER GDP GROWTH GDP PREVIOUS
2001 Q1 -0.6 1.3
2001 Q2 -1.6 0.3
2001 Q3 -0.3 -1.3
2001 Q4 2.7 1.7
2002 Q1 5.0 6.1
2002 Q2 ??? 1.1

As you can see, the difference between the previously reported “official” numbers and the new “revised” numbers averages 1.22, which, in light of the data for the current quarter, is a discrepancy of a mere 111 percent. This is as if ESPN reported that Babe Ruth hit 714 home runs … or, upon further review, 1,507. Or something.

This huge margin of error is actually lower than the Federal Reserve’s historical standard, which is 1.4. Thus, the 1.1 percent growth reported last week may quite possibly turn out to be a .3 percent decline three months from now, and would mark the onset of the second phase of the double-dip recession that all the financial analysts were busily discounting as they announced their daily sightings of the bear-market bottom.

If the Q2 numbers are revised downward in such manner, then all of the decisions which are being made now – from Alan Greenspan considering new basis-point cuts to first-time homebuyers wondering how much of a mortgage to assume – will almost surely be incorrect. After all, what business wants to commit to new capital investments if the economy is entering a serious recession and its sales are about to drop? Decisions based on bad data are not necessarily wrong, but they are more likely to be wrong, and especially if one is under the false impression that the data is accurate.

Now, I am with the Austrian school of economics which asserts that this data is not only bad, but essentially fictitious, and attempting to use it to outsmart the Invisible Hand is both a threat to freedom and doomed to failure. But I hope you can see that even if one accepts the economy’s statistical indicators at face value, using them to fine-tune the economy is like driving a car with a sledgehammer. Repeated blows on the steering wheel might allow you to keep the vehicle on the road for a while, if you’re lucky, but eventually a crash will come.

So, in the immortal words of Public Enemy, “don’t believe the hype.” The double-dip is here, and I’m guessing the S&P 500 will see an eponymous 500 before it gets back to 1500 again.

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