I am pinching whole a comment by Stirling Newberry which is a great summary of why economic statistics are so easy to manipulate:

In the world of econometrics – that is, finding ways to measure economic activity – the question of cooking numbers is a delicate one. One man’s "adjustment" is another man’s "cooking the books". Within the range of what we know, some numbers can be, arguably, to either side. All economic numbers have error bands.

Where the real cooking is going on is by the focus on a few "headline" numbers. Any headline number can be primped up, at the cost of some other headline number. The tactic is to primp one number at the cost of another, and then dismiss the bad number. For example, run a big federal budget deficit to keep the employment numbers from looking so bad, and then say "well deficits don’t matter".

Another problem is that many numbers are accurate, but they don’t measure what people think they measure. Let me take my favorite – the unemployment rate. The unemployment rate represents a variable in various macro-economic equations, and it is measured in such a way so that the macro-equations produce predictive results. In short, it is fiddled with so that other numbers, some of which are also fiddled with, yield the right results. The unemployment rate, specifically, measures the demand for labor. Now in an inflationary enough environment, supply and demand for labor will clear, and all unemployment is frictional, and therefore a lack of demand which can be fixed by lowering interest rates – and so long as the inflation rate is low enough that’s what the central bank does, lower rates until inflation shows up.

However when the labor market doesn’t clear there is something that the unemployment rate doesn’t cover, and that is the demand for jobs. And that was the case starting in the late 1950’s – which is one reason for the New Frontier and Great Society – and it is the case starting in 2001 now. People are told "the unemployment rate is low". Wonderful, bankers rejoice. But what is important to people is whether "job supply is high" and that isn’t the case. Low job supply means few jobs created, few increases in real wages, less upward mobility, longer times being unemployed – all of which have happened. Finding a number to represent this, and getting that number out, is important. CAP has its "constructed unemployment rate", I use "labor slack", and the bls puts out other measures of unemployment which include "discouraged and marginally attached workers plus part time for economic reasons".

The CPI-U is another such number. It measures the ability to stay at a constant level of access to living standard relative to others. That sounds like a mouthful. Let me put it another way: it is the cost of keeping up with the Joneses. It is different from CPI-W, which is constant access to standard of living, and it is different from the GDP deflator, which is a better measure of overall inflation in the economy. There are also inflation measures for producer prices and other "baskets" of goods and services, though consumer, economic and producer inflation are the most important.

Thus when people are told "the Consumer Price Index is low" that doesn’t mean what they think it means. What it means is that the cost of staying in place, relative to others has remained the same. When the way the CPI-U was calculated changed, it changed GDP figures and a host of other economic numbers. It was, importantly, a change in policy. We no longer promised people, particularly retirees, that they would be held at a constant standard of living merely that we would keep them in the same place on the scale. If the scale drops and people have to start buying chicken rather than beef, then you will to. If the scale drops and people watch movies at home because they can’t afford a theatre, you will do.

This is the biggest form of cookery – telling people a number, and then implying a context that doesn’t exist. In the present circumstances, unemployment being low isn’t really good news. It says that the economy cannot soak up the workers who were pushed out of the workforce in the last recession. It also means that Greenspan has to stay on a tightening course, because there is no overhead in the macro-economy to lower rates, despite what several emminent economists (such as Bob Riech) would like the Fed to do, and that is lower rates. Unfortunately we can’t.

And that is at the root of what I have been saying over and over again. The problem isn’t down turns. There are always going to be recessions and downturns, at least as far as the eye can see. The question is where the long term trend of growth is, and whether that long term trend is going up or down, and whether our policy decisions are making that long term trend of growth go up or down. In terms of policy, I can’t promise that liberal policies with progressive government will produce endless prosperity. I can promise that they will produce higher growth over the longer term, spread the risks of the temporary down turns over a large group of people, that they will avoid unsustainable situations where demand for oil is going up faster with no substitute for it, that when downturns come those who are unfortunate enough to be caught in them will be cushioned against the full blow, and that those who are marginalized and left out during times of prosperity will get access into the affluence the rest of us enjoy.

Since I’m not predicting "a crash or even the beginnings of a crash", to quote on recent diary, I’m not going to say why one hasn’t happened. I am saying that regardless of how the economic cycles play out, that current policies produce substandard growth, and will do so as far as they eye can see. That in the short term that means that with each recession people will fall farther and farther behind, and that, eventually, this will mean that other nations can dispense with us as the "designated loser" of the world economic system, and, at that point, stop extending us credit. On the contrary, they will come to collect.

Ask the British what that feels like.