Was boom a dream?

Doug Henwood dhenwood at panix.com
Fri Feb 8 12:01:39 PST 2002


Carl Remick wrote:


>From CBS MarketWatch chief economist Irwin Kellner, "Enron, Andersen and the
>double-dip: Will debacle spread to economy?":
>
>"Finally, if corporate earnings restatements become ubiquitous, can
>the economic statistics be far behind? Clearly, the government's
>measurements of the economy's performance depends in large part on
>the data it gets from Corporate America.
>
>"If the profits many firms said they racked up in the latter part of
>the 1990s turn out to be crafted out of whole cloth, who is to say
>that the economic boom of that period wasn't a chimera as well?"
>
>See
>http://cbs.marketwatch.com/news/story.asp?guid=%7BEF2FE72A%2DE4E1%2D4C53%2DA4C1%2D614E42A03E02%7D&siteid=mktw

Hmm, Kellner used to be a pretty prominent Wall Street economist - is he semi-retired now?

Warning: entering heavy geek zone.

Anyway, just spoke with Kenneth Petrick, the guy who does profits in the national income and product accounts (NIPAs). There are several things wrong with Kellner's claims. One is that the NIPAs have two sides, income and product, as the name suggests. Income is earned in production, and in concept the two sides (national income and national product) should balance. In practice, they don't quite match, and the difference is called the statistical discrepancy. The Bureau of Economic Analysis, which does the NIPAs, says that the product data is more reliable, which is why they headline the GDP numbers, rather than GDI. Profits are on the income side. So inflated profits don't have any effect on estimates of GDP.

Also, the BEA uses Compustat - the S&P division that assembles financial reports of public corporations - for current estimates. Compustat breaks out recurring and nonrecurring charges (e.g. restructuring costs, writedowns), and BEA ignores those. In other words, they're trying to get at the truth underlying corporate reports. But they revise this preliminary data when they get tax return data from the IRS, which comes in with a delay of about 2 years. The tax figures are considerably more accurate than the reports to shareholders So, the 1998 and 1999 profit figures have already been revised - downwards. Many high-tech firms were "hemorrhaging" money in those years even as they were reporting healthy profits to shareholders. But the point is that these figures have already been revised down. The 2000 and 2001 numbers could be revised down over the next couple of years, but Petrick suspects the revisions won't be as large as they were in 1998 and 1999.

Doug



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