Why Same-Month-Year-Ago Comparisons Won't Work

Even something as unpleasant as a job search can occasionally produce some "learning." In my search for an economic consulting firm that would hire me to do for money what we're already trying to do here for fun, I came across this history of economic consulting in Canada by Canadian Business Economics (linked through Global Economics LTD). In the article is a quick review of an early pamphlet produced by Beckett Associates, the title of which I borrowed for this post.

Basically, Beckett produced a simple metaphor to explain why same-month-year-ago comparisons don't explain what they are used to explain. Imagine thirteen mountaineers, all linked by rope, climbing a mountain in fog so thick that they are unable to see one another. Only the first and thirteenth mountaineer are allowed to call out their altitude. The presumption here is that so long as the first climber's altitude is higher than the last climber's altitude, they haven't yet reached the summit. By extension, once the two climbers call out the same altitude, they have reached the summit - however, the two climbers could also be at the same altitude if the first climber continued on past the peak and was already well down the other side of the mountain.

The implication for economic analysis is that when you hear something to the effect of "Growth in August was up 2.4% compared to growth in August of last year," you should pause and consider the implications. If we extend the metaphor, the economy could very well be climbing a small hill before slipping on the ice and falling off a precipice into a dark, cold cavern full of sharp rocks (too much?). Instead, a 12-month moving average should be centered on the 6th month.

I have already been guilty of reproducing statistics on this blog that use this type of logic, so hopefully that will change. Also, the next time some obnoxious person at a cocktail party starts quoting statistics of this sort, you can take them down a peg or two. Can't say we're not looking out for you.