Estimates and projections

All the financial writers on your publication's staff have been laid off, so your editor wants you--with your zero experience in financial reporting--to prepare a story about the direction of key economic indicators over the next two years. The focus will be on corporate profits nationwide, and it is your task to come up with some reasonable estimate of how profits will fare.

And no, your article may not consist merely of dueling quotes, as New York Times columnist Paul Krugman describes them, from economists with opposing views. You have to generate your own estimate, and then, perhaps, vet it with the views of experts.

Chill. First thing to keep in mind is that estimates--or in this case projections--are notoriously shaky things. The most solidly grounded projections can be upended by unforseen events: an unexpected war (think Iraq); the vaporizing of a bubble (housing, the dot.com debacle); implosion of some of the country's leading financial institutions (Bear Sterns, Lehman Bros.); a devastating earthquake.

But however common such cataclysmic events are today, you cannot approach your story with the view that they will always take place. You have to assume that the nation's economy does contain some degree of stabilization, without which no estimates, let alone projections, can be attempted.

So here's how to attempt it: We assume that corporate profits have a certain ratio (relationship) to Gross Domestic Product. Therefore,

1) Get an official listing of corporate profits over the past few years.
2) Get an official listing of GDP over the past few years
3) Get an official projection of GDP over the next few years.
4) Divide existing profits by existing GDP over the past few years. This gives you recent annual percentages--your ratios, in other words.
5) Now note if these percentages follow a slight pattern. For example, do they decline each year? Increase each year? Go up and down?

All this is easier than it sounds. Let's start with steps one and two. Both recent corporate profits and recent GDP figures are available from the Commerce Department's Bureau of Economic Analysis. Click on this site, and go to Table 11. On the top line, you'll see that corporate profits for the past three years were:

2006: $1,608.3 billion (or more than one and a half trillion dollars).
2007: $1,541.7 billion.
2008: $1,360.4 billion.

In other words, recent profits in general (as of this posting) have declined over the past three years. No surprise there, given our deep recession. (Ignore the fact that some companies made out like bandits during the same time period.)

Now go to Table 9. You'll see that GDP was:

2006: $13,398 billion.
2007: $14,077.6 billion.
2008: $14,441.4 billion.

GDP rose slightly. (If only jobs and wages rose along with it! But stop digressing.)

Now divide each year's profits by that year's GDP. Use a calculator, or better still, a spreadsheet program like Excel. Here's what you'll find: In 2006, profits were twelve percent of GDP. In 2007, they were eleven percent. And in 2008, they were 9.4 percent.

In other words, recent profits appear to follow a slight downward pattern in relation to GDP, dropping by one to two percent of GDP each year.

You're almost done. Now you need to apply this pattern to the GDP projections, which you can get from the Congressional Budget Office. The top line of this report shows that the CBO projects GDP for 2009 at $14,163 billion; and for 2010 at $14,570 billion.

So take, say, 8.5 percent of the 2009 amount. Why? Well, it follows the pattern: it's nearly a point below the 2008 figure. (You can tinker with this percentage a bit, after you talk to an economist or two.) So you get $1,203.85 billion projected profits for 2009.

Now take, say, 7.2 percent of the 2010 GDP figure: you get $1,049.04 billion projected profits for 2010.

You now have your own projections. Are they accurate? Well, many factors affect profits, of course, and anything can happen to disrupt the pattern. But other things being equal, these projections are, indeed, reasonable assumptions.

Misleading percentages

When is a fact less than a fact?

When the fact is a percentage of a very small absolute number.

For example, I can state with near certainty that I gave more to philanthropy last year than most other Americans. Indeed, while individuals in general decreased their giving by 2.7 percent (even steeper after inflation), according to the Giving USA Foundation, I increased my giving by 100 percent!

What I'm not revealing, of course, is that my altruism amounted to precisely one dollar in 2007, and to two dollars the next year--a one hundred percent growth rate.

Okay, this is an extreme hypothetical example, but real life examples abound, especially in political campaign literature. A critique of the Michael Bloomberg campaign for Mayor in New York City, for example, cites US Department of Education figures showing declines in violent crime at certain Impact Schools during Bloomberg's reign "as large as 59 percent for major crime...and 33 percent for all crime...." But it adds immediately that "the numbers on which these percentages are based are so low that even very small numerical deceases create large percentage changes."

That's the key point. In one NYC high school, the critique notes, violent crime dropped forty-one percent between the 2004-5 to 2005-6 school years. A phenomenal decline? Not when you realize that the number of incidents in the earlier period was only seventeen, and in the later period ten. To be sure, any decline in violence is good news, but the percentages cited present an unwarranted picture of astounding success by the Administration.

As noted in one of my favorite books, "How to Lie With Statistics" by Darrell Huff (1954), "Percentages offer a fertile field for confusion. And like the ever-impressive decimal they can lend an aura of precision to the inexact."

For journalists covering political campaigns--or anything else--it's good to keep in mind Huff's admonition: "Any percentage based on a small number of cases is likely to be misleading. It is more informative to give the figure itself." (Emphasis added)
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Full disclosure: The critique cited above was prepared by the former leader of a tenants organization in which I was an active member.

Citing imports to gauge US trends

Unless they work for Goldman Sachs or JP Morgan, even the rich are having problems these days. In fact, that's the theme of the story your editor assigns to you. Give examples, s/he says, of how the rich aren't buying as many luxury products as they once did.

You select jewelry (the non-costume kind).

Where to start? Typically, you call Tiffany's, and ask how business is doing. Or, you go to Tiffany's website, or to the website of the Securities and Exchange Commission, and get the company's annual report (10-K, in governmentese). From that, you compare this year's sales with last year's, and draw the appropriate conclusion.

But Tiffany's, no matter how prominent a luxury retailer, is still only one. There are many others, and most of them are privately held, which means they aren't likely to release their revenue or profit and loss figures.

So here's another approach: find out how the countries that export the most jewelry to the United States have fared in 2009 versus the year before.

Start with one of the government units that tracks imports and exports. It's the International Trade Administration. (There are others, but don't bother about them now.) Then click on "Consumer Goods."

On the left, you'll see a list of industries: click on "Jewelry."

When the new window opens, look for "Current Imports," and under that "Jewelry (except costume)." Clicking there yields a page of how all the major exporters--India, China, Thailand, Italy, Hong Kong, France, etc.--are doing. Glancing at the very last column on the right, you can see that all of them have sharply lowered their exports of jewelry to these shores, at least over the first six months (from January through June). India is down more than twenty-eight percent, China more than thirty-seven percent, Italy almost forty-two percent.

So this column contains the most important figures for your story. If these countries are shipping so much less, it can mean only one thing: the rich (and likely the upper levels of the middle class, which is also a vast market for jewelry) simply are not buying as much as they used to.

That's a good statistical grounding for your report.

Subjectively objective

Your story on how well or poorly American families fared in 2008 compared with 2007 is due shortly. You've completed all your interviews with selected families, and with two respected professors of economics. Income, not surprisingly, is the first issue you tackle. Here's where your hard facts come in. . .or so you think.

For your most important hard fact, you will cite data on income. But reviewing your notes, you see that one professor said families increased their income by nearly a thousand dollars during the year, while the other professor said household income declined during that time. Not only that, but the first professor said that 2008 income was over $67,000 per family, while the second maintained that, no, it was only around $52,000.

Both professors cited the same source: the U.S. Census Bureau.

Neither professor is wrong. The Bureau, rightly regarded as the gold standard in data collection on income and population, is also (in)famous for its blizzard of statistical reports, so many of which appear to present conflicting data, on the same subjects, for the same periods of time.

What does this mean to you, the journalist? It means you have to visit the Bureau to find the "correct" figure yourself. Not a daunting task, but it is essential that you pay close attention to the definitions the Bureau uses. For example, it makes a distinction between families and households. To confuse matters more, it has a separate definition for family group. And another for family households.

So in one report, Median Household Income in the Past 12 Months by State and Puerto Rico: 2007 and 2008, you will see that the estimate of median household income in 2008 was just as the second professor noted: $52,029, around six hundred dollars less than in the year before. But in another report, Median Income for 4-Person Families, by State, you'll find 2008 median income for this particular family composition just as the first professor said: $67,019, or some nine hundred dollars more than the previous year.

Further, one report uses fiscal years, the other calendar years.

There's really no rule of thumb regarding which figures to use. Most likely, your decision will reflect whether you want to show that we're worse off now, or better off. In other words, no matter how "objective" you think you are, to some extent the hard facts you choose to cite will reflect your subjective view. That's inevitable. If you wish to be honest, alert your readers to the differences between households and families (essentially, households may include people who are not related to each other). Full definitions are available at the Census Bureau site.

In the end, to maintain your integrity as a journalist, don't wave the flag of "objectivity." That term is a lot murkier than it appears.

Fudging questions

More on surveys: As part of a story you're covering on some environmental issue, say logging, you're asked to guage local public opinion. To do that, you need to prepare a survey of a select population. (Let's assume you have access to the names and addresses or e-mails of a random sample of that population, obtained from a list broker.) So you set out to formulate the questions.

Be careful: the questions have to be as neutral as possible, a very difficult task, especially in light of the politically charged atmosphere surrounding all environmental issues. Indeed, many fund raising organizations, on all sides of an issue, often send out "questionnaires" that ask highly loaded questions. They appear to be neutral, but are anything but.

For example, a pro-logging group might include in such a survey a question that asks: "Did you know that trees are a self-renewing energy resource?" What they do not explain is that it takes years and years for a woodland to renew the trees that have been logged, especially in cases of clear-cutting. And that, in the interim, logging can cause flooding and other ecological disasters. Or they might ask, "Do you think trees, which are self-regenerating, should take precedence over the right of people to work their way out of poverty?" Which assumes--tugging at the heart-strings--that logging is the only way for the population in question to make a living.

On the other side, an anti-logging group might ask, "Which of the following is more important: preserving our environment, or allowing giant lumber companies to reap huge profits while destroying our woodlands?" The bias here is obvious: all logging is bad. What they don't say is that some logging, done carefully, has been found to be ecologically beneficial, by allowing for new tree growth. And some lands, placed off-limits to logging, suddenly become susceptible to even more environmentally destructive developments, such as strip malls.

Regardless of your own position on an issue, as a journalist you need to formulate your questions to reflect as much disinterest as possible. Only then will you be able to tabulate answers that are statistically meaningful, and thereby generate a story that is honest. You might ask, for example:

"Loggers argue that trees are a renewable resource. Environmentalists argue that logging is overly destructive of the eco-system. Which of the two positions most accurately reflects your views?"

Then give options:
A) The loggers' position
B) The environmentalists' position
C) Both have equally valid points
D) Not sure

You're on the way to generating public opinion statistics that are not only valid, but that give you an exclusive.

Mini-Surveys

You're doing a story on public reaction to some local policy initiative, say a new park planned for the neighborhood. Normally, you go out and interview a few people, ask their views, and compile it into a story. But this time you want to get a more representative sample of public opinion than the views expressed by a few passersby. You do a Web or library search, and discover, alas, that no surveys have been done on this particular issue (call it the Park issue).

That means you have to do your own survey. But you don't have a background in statistics or market research. And you were never really good in those subjects anyway. No problem; it's a local story, so no need to hire a professional polling firm.

Your company allows you to buy, from a list broker, a list of randomly selected neighborhoood people, with their postal or e-mail addresses. (The random selection just means that the list is statistically representative of the community, so you're in good shape.) Your task now is to formulate the written questions. This is the most important part of your research.

Here's the wrong way to write it: "Do you support or oppose the new park planned for this neighborhood?"

Here's the right way: "Please indicate your position on the new park planned for this neighborhood:"

1) I support the park
2) I oppose the park
3) I'm not sure

Here's the wrong way for the next question: "Why do you support or oppose it?" Or: "Why aren't you sure?"

Here's the right way:
"If you support the park, please indicate why. Select as many reasons as apply:"

1) A park adds a much needed open-air resource to our congested neighborhood.
2) We need a safe place for children to play.
3) [Reason 3]
4) [Reason 4, etc.]
5) Other (explain): ______________________________

"If you oppose the park, please indicate why. Select as many reasons as apply:"
1) The park will raises taxes, which we cannot afford.
2) The park will require destroying our already small supply of affordable housing.
3) [Reason 3]
4) [Reason 4, etc.]
5) Other (explain): ______________________________

For those who are not sure, you can call or interview some of them later to discuss their hesitation.

Of course, there are other things to consider in conducting a survey. But the important point here is that written questions, unlike verbal questions, must be very tightly forumulated, with multiple choice options given to the respondents. That's what makes it possible to tabulate. It's what enables you to quantify public opinion: "X percent opposes the park, Y percent supports the park, Z percent are not sure."

And after you get the statistics, you can go back to interview some respondents to elaborate on their views.

Percents, perhaps

This may seem hard to believe, but I have often had to explain to journalists, both seasoned and newcomers, how to compute a simple percent change between one number and another. I'm talking eighth or ninth grade math here. Blame for this ignorance can be shared by many: our education system, the explosion of calculators, the computer revolution, whatever. Anyway, the math is simple: You divide the later figure by the earlier figure and subtract 1. But you don't need to remember that. Just follow these few steps, using Excel or any other good spreadsheet.

First, of course, get the numbers. Say a small nonprofit organization issues a statement that it has taken in $354,600 in donations in 2009, versus $329,089 the year before. By what percent has the organization increased its fundraising?

Open the spreadsheet. In the first "cell," that is, A1, type in the year "2009."
1) Tab over to the second cell, or B1. Type in the year "2008."

2) Tab over to C1. Type in "Percent change."

3) Now tab back to A2 (which is just under A1). Type in $354,600.
4) Tab over to B2. Type in $329,089.

5) Now tab over to C2. Here's where the computing starts: In C2, type this formula: =A2/B2-1.
6) You get 077522. That doesn't look like a percent, but it is. It's 7.8 percent. You can see that yourself by putting a decimal point after the 07. But here's an easier way (well, a more computer-savvy way):

7) Select the C2 cell, and search the formatting bar for the percent (%) sign. Click it. You'll see the C2 cell change to 8%. That's your answer, rounded. The organization increased its fundraising revenue by around 8 percent.
8) If you want a more precise figure, click on the "Increase decimal" icon on the formatting bar(near the % icon). That will change the 8% to 7.8%. Done.

The importance of imports (and exports)

You may think that enough has been written about the relationship between the housing bust and our current Great Recession to render the issue over and out, but your editor insists that the subject is of lasting interest. S/he assigns you to come up with a new angle on it, and this time, you'll need to back up your quotes and statements with some hard statistical data--that you have to dig up yourself!

Ugh.

You can do it. The main source for this type of information is the U.S. Commerce Department, which has a treasure trove of data on almost every conceivable economic issue. The problem is, its websites are often confounding even to the most savvy users. Still, you'll need to check it out.

The story angle you come up with is this: Given the housing bust cum recession, what's happening with imports of home products, like furniture? Most furniture, like so many other things these days, is imported. So,then, are imports of, say, upholstery, up or down? And by how much?

Go to the Commerce Department site that will lead you to the data.

Don't freak over the zillion items you see on the page. Just click on the following, in order:
1) Country/Product Trade Data.
2) NAICS web application.*
3) In the "Select 3-digit NAICS" search box, hit the down arrow and search for "furniture and fixtures." Click on that.
4) Then click "Go." (This is a must; lots of users forget this step.)
5) In the search box that says "Select 6-digit NAICS," click on the down arrow, and look for upholstered household furniture. Click on that.
6) Then click "Go."
7) In the date box, select the month and year you want, which as of this writing is June 2009. (The most current month is the default, so you may leave it as is.)
8) Along the first line, which says "World," look for "Consumption Imports." Under that, look for "Customs Value Basis."

Voila! Here's your data: It shows that the U.S., in June 2009, imported $14,624,000 worth of upholstery.

So what you do with that figure? Compare it with June 2008 (go back up and set the date to June 2008). Click "Go." And look: a year ago during the same month, we imported $223,894,000 worth of upholstery.

Now you have your story: thanks most likely to the recession and housing slump, imports of upholstery plummeted over the year! It makes sense: People who don't buy new houses don't need to furnish them. So importers cut back. All that's left for you to do is embroider your story with quotes and comments.
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*NAICS, if you care, stands for North American Industry Classification System.

Corporate financial statements for dummies

Your publisher just laid off the entire financial reporting staff, and you, thrilled to keep your job but dreading dealing with numbers, are told to write a brief story, just a few column inches, based on a corporation's quarterly or annual report. The very kind that consists largely of columns of mind-numbing statistics, strange terms, densely packed data--everything you hate about financial information.

Don't fret, truly. It's much easier than you think.

First, get the data. If you can't get the latest annual (or quarterly) report at the company's website, go to the Securities and Exchange Commission website, and click on: Search for Company Filings. When the window opens, type in the name of the company (let's use The Home Depot for this example). A window will open with the company's name. Sometimes several companies have similar names, and they are listed here too; make sure you click on the correct one.

Another window will open, showing all the reports filed by the company. Look for the report labeled "10-K," and click on "documents." (If you're doing a quarterly report story, look for 4-Q.) In the next window, click on the first item, which will open the 10-K, otherwise known as the annual report.

The 10-K document opens. Don't bother reading the text. Just scroll down to a heading that says something like "Selected Financial Data" or "Consolidated Statement of Finances."

A financial page will appear. Don't panic: All you need are a few numbers: Net sales or revenue for the current year and the year before; and net income or earnings, also known as profit, for the two years.

These will give you a snapshot of how the company fared during the year compared with the year before. They will show you whether it took in more or fewer dollars this year through its sales, and whether it made a higher or lower profit--or even suffered a loss. If you can compute a percentage change between the two years for sales and profit--another very easy procedure--so much the better.

Want to appear more sophisticated? Check out the line that says "Operating expenses" for the two years. That will show you if the firm's expenses went up or down over the year. In other words, is the firm doing a good job controlling expenses, or a lousy job? Then you can use your journalistic skills to ask an appropriate company executive to explain why expenses went up, or down.

Executives are wont to complain that the net income or profit figure is somewhat misleading, since it has been lowered by things over which they have no control, such as taxes and interest payments. They say the real measure of how their company is doing is their "Operating income," which doesn't include taxes and interest. That's the figure, they say, that reflects how the company's own operations generate profit (or loss).

Okay, so you can use that figure in your story as well, but if you do, be sure to include it later on, rather than in the first paragraph: your primary audience is not the executives, but your readers: they want to know how the firm is doing overall, taxes and interest and everything else included.

Converting currencies

You're doing a story comparing wages in Europe and the U.S. The European figures, of course, are in euros, and the U.S. figures are in dollars. To translate one into the other is simple: go to a typical currency conversion website, such as Yahoo's currency converter and enter the relevant boxes. That will give you today's exchange rate.

But what if you're comparing wage differences over a period of years, say between 2005 and the present? You can't use today's rate for the four years, because the rate changes--daily, in fact. And you can't simply select an arbitrary day for whatever year you're following, because the rate in January may be different from that in September. You need exchange rate averages. Here's how to get them, from a site not well known: Oanda.

In the "convert amount" box, type in the exact amount of euros (or any other currency you're dealing with).
In the "starting date" box, go to January 1, 2005.
In the "duration" box, scroll down to "year."
In the "ending date" box, go to whatever date you are writing on (in this case, today's date).
Under "base currency," scroll down to euros.
In the "quote currencies" box, scroll down to US dollar.
Then click "Get table." That will give you the average dollar amount--the average wages--for the period of 2005 through today. Readers can now tell which wages were higher during the period: European or American.

And if you want to be a bit more explanatory, do this for each year (2005, 2006, 2007, 2008 and 2009). Then you can compute the annual percentage differences for each currency: how steeply wages rose or fell each year in Europe and in the U.S.

Research tips for writers who hate numbers

I'm not sure why, but many reporters I've worked with over the years, either colleagues or outside journalists calling for information, seem to have a strong aversion to crunching numbers. (I'm excluding, of course, financial reporters.) They have no problem quoting "experts" who offer this or that estimate--on anything from the growth of inflation to the exchange rate of euros to the percentage change in some corporation's quarterly operating income. But they rarely seek to develop their own estimates, let alone extract signifcance from a column of numerical data.

What I hope to do with this part of the blog is to provide some simple steps for such writers or editors to get the numerical information they need, without trepidation, and without having to chase after some academician or security analyst. Some of the tips will be super-simple, such as going to a particular website and following the prompts. Others will entail a few more steps. But whatever the process, I hope to present it as easily as possible.

First challenge: measuring inflation, or translating dollars from years past to today. Suppose you're doing a story that includes somebody's salary in the year 1975. You find out, through an interview, that he or she earned $9,000. How much is that in today's currency?

Do this: go to the website of the US Bureau of Labor Statistics' inflation calculator. The caculator will appear. In the top box, type in $9000. In the second box, type in the year 1979. In the third box, type in 2009. Hit "calculate." The answer appears as $26,738.80; you can write something like "roughly $26,700."

Why "roughly?" Because the Bureau measures general consumer inflation, which is what most people are interested in. But that measure doesn't mean much to, say, a hospital or construction company or university, where costs tend to rise far more rapidly than basic consumer goods, like a basket of food. Later, we'll talk about how to measure inflation in those areas. For most purposes, though, the BLS estimate is appropriate: you don't need to call an economist to figure out what yesterday's prices mean in today's prices, or vice versa.