Tags: economic | recovery

Ignore the Media Blather About Recovery

By Michael Carr   |   Wednesday, 15 Apr 2009 09:27 AM

The issue of media bias is well documented in political reporting. Less well-known is that economic news is also subject to spin by reporters. Smart investors should dig under the business headlines to find the real story.

In March, for instance, the Baltic Dry Index was being called “the best economic indicator you’ve never heard of.” After increasing nearly 250 percent in a month, many wrote that the index was heralding a global economic recovery.

The Baltic Dry Index is a very good indicator of global economic activity. It tracks the prices being paid by manufacturers for large cargo ships, which are the most important transportation component of international trade.

Less than a year ago, the index reached an all-time high of 11,793, in May 2008. As the global economy melted down, shipping rates fell an incredible 94 percent in less than seven months.

Its equally sharp recovery in the first quarter of 2009 gave rise to optimism among commentators. But as the economic recovery failed to take hold, the Baltic Dry Index as a story has disappeared — its 36 percent decline and 21 consecutive losses over the past month have barely been mentioned.

It was the same last year as gas prices moved ever higher in the summer of 2008. Each day brought news of struggling SUV owners. As gas later fell precipitously, however, those stories were not replaced by tales of affordable RV vacations.

The media follows the story it wants to follow and seems to ignore the news that doesn’t fit its economic bias. Last year, for some reason, the media focused on the negatives. Lately, the theme has been more optimistic. Both views are, arguably, mistaken.

Now, as the economy continues to contract, the media seems to be saying, “Don’t worry, be happy.” Retail sales are down, but the headline notes that sales are falling at a slower pace. Manufacturing numbers are worse than ever, yet the headlines report that management at these companies thinks a bottom is in.

The economy is still slowing, and at a slower rate than in the crisis we saw last fall. There are few signs of recovery, yet the tone of business coverage has changed significantly.

In March, for example, the unemployment report showed the largest number of job losses since the recession began. But the headline focused on the fact that losses were lower than in the previous month.

Left unreported was the fact that the initial report is only an estimate. According to The New York Times, an initial report of losses is often revised upward by more than 100,000 jobs in the next month. If that pattern holds, February likely saw almost three-quarters of a million newly unemployed.

Meanwhile, when January job losses were initially announced, there were “only” 598,000 newly unemployed. This was revised upward four weeks later, because government economists always revise their initial reports. That revision, too, was ignored by the media.

Indicators point in different directions, too. Employment is a lagging indicator. It tells you about the past. But the Baltic Dry Index is a leading indicator of economic activity. Both now tell the same story, one obscured by sunny, feel-good headlines — the recovery is not here yet and uncertainty remains.

For investors, the widely reported news is probably best ignored. The stock market may be in the midst of a bear market rally, just like the Baltic Dry Index experienced a relief rally followed by a deep decline. And, of course, the worst may be behind us after all. In all likelihood, investors should be preparing for a challenging investment environment.

One thing is certain: A headline does not a recovery make, and investing based on news reports is a poor strategy.

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The issue of media bias is well documented in political reporting. Less well-known is that economic news is also subject to spin by reporters. Smart investors should dig under the business headlines to find the real story.In March, for instance, the Baltic Dry Index was...

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