posted on 06.04.14

Some thoughts this month about numbers and looking at data. The core of cyclical forecasting is yr/yr growth. By averaging out the data for 12 months and comparing it to the previous 12 months it becomes possible to see the influences of the underlying business cycle. Problems can arise, however, with “mirror images.” For example,  a company might have unusually strong sales in the first quarter.

The yr/yr growth curve will rise and then stay high for the next three months even if sales for the rest of the year are normal. As soon as the high quarter drops from “current year” to “previous year” in the yr/yr computation the curve drops sharply.  In this case the growth curve is deceptive. There is no corresponding drop in quarterly data; rather the yr/yr drop is a “refection” of the one high quarter.  Now consider the opposite and look at the GDP. The low first quarter GDP has caused a drop in the outlook for the entire year, even assuming the rest of 2014 is “normal.” The forecast now has the GDP up 2.3% in 2014 rather than the previously expected 2.9%.

In a mirror image, the first quarter of 2015, quickly rises to 2.7% growth. Businesses that were affected by the severe winter weather this year may show similar “mirror images.”  Graphs can be deceiving. The graph in the full report, inspired by a brokerage firm newsletter, shows how rapidly wages are increasing in China compared to the United States. This would be enough to make any company consider manufacturing in the U.S. rather than China – if the scales were the same.  Actual wages in China remain much lower. Percent changes in small numbers just sound more impressive than in large ones.

To view the full economic report, log in to the MTI members only area and click on DeWolf Economic Report in the featured resources box.