Tuesday was an up day in the stock markets. What did the headline writers think?
Wall Street resumes rally following housing report (Associated Press; link)
What did this great housing report say? Here was a version from Marketwatch, with my comments.
Housing starts surge 22% on apartment building
It was the largest percentage gain in 19 years and was the first increase in eight months in the sector that was at ground zero in the global economic recession.
At the minimum, they claimed to see a local maximum, perhaps even a global maximum
The housing data in winter months are especially volatile because of the weather.
Was someone hedging? It was unclear at this point how important this piece of information was. Some professionals expressed skepticism that the news was really positive:
"We're inclined to write this off as a weather-related fluke for now, " wrote economists for Wrightson ICAP.
Notice they hedged too, using the words "inclined to". Perhaps they had a reason to doubt the news. The article now cited less rosy numbers:
But despite February's gain, housing starts are down 47% from a year ago, and are down 74% from the peak in early 2006. Permits are down 44% in the past year.
And even more bad news:
The National Association of Home Builders reported Monday that its sentiment index was stuck at 9 on a scale of 1 to 100 in March.
Did that really say 9 out of 100? Sounded really bad for a nation of optimists and grade inflators. One had to start wondering about the headline. Was that 22% growth a fluke? Did it mean anything?
Now, two-thirds of the way down, the article revealed its essence:
The government cautions that its monthly housing data are volatile and subject to large sampling and other statistical errors. In most months, the government can't be sure whether starts increased or decreased. In February for instance, the standard error for starts was plus or minus 13.8%. Large revisions are common.
The key news about the sampling variability was a throw-away line ("for instance").
Here, the author was confused about standard error and margin of error. Standard error, being a standard deviation, cannot be a negative number. The range of 22% plus or minus 13.8% is a margin of error. This is a gigantic range, between minus 8.2% to 35.8%. While we conclude that the growth was statistically larger than zero, we have to wonder whether this number has historical significance (best in 19 years?)
Worse than that, in any month when the growth is less than 13.8%, this level of sampling error means the growth rate is not statistically different from zero. Thus, the most newsworthy sentence of the entire piece was:
In other words, this statistic of growth in housing starts is junk. If we really want to examine this statistic, the survey needs to use a much larger sample.
MarketWatch is to be commended for noticing the volatility issue. Of the dozens of articles that came up in a Google search about the housing starts data, none others mentioned this problem.
The original government press release is here (pdf), with all the fine print.