The US unemployment rate rose to 5.5% in May, the biggest jump since 1986.

The picture would be even bleaker were it not for controversial changes in statistical methodology at the US Department of Labor, says Dave Gonigam in The Daily Reckoning.

Slowly but surely, awareness is growing that government economic figures are being cooked.

[Economist John Williams] accused the current Bush administration of taking advantage of a switch to monthly instead of semi-annual seasonal adjustment of job creation data to “bring the number in where they want it,” though he admitted he had no evidence.

Bureau officials said they were mystified by accusations that the agency falsifies data. The 2003 shift to monthly seasonal adjustment of jobs data ‘was recognized statistically as a better way,’ said Assistant Commissioner Patricia Getz.

In any case, she noted, payroll figures are matched once a year with tax records to produce an accurate tabulation of the number of jobs in the economy.

Yes, but those once-a-year numbers aren’t what get plastered across the front pages of newspapers and screamed out on CNBC. And that’s the whole idea. Ditto for the various US unemployment measurements. The government still publishes many of the gloomy ones every month, but the headline number is what gets continually tweaked and twisted. This is what sleazy government lawyers like to call ‘plausible deniability.’

John Browne examines the wider concern over statistics manipulation in Money Morning this week.

Like watching a poorly dubbed martial arts film, the average American is beginning to notice that the dialogue does not match the on-screen action. As a result, many people are developing a deep suspicion of statistics, which over time will greatly diminish the government’s credibility. In the coming economic crisis, this loss of credibility may have severe consequences.

One vital statistic in the perception battle is gross domestic product (GDP), which is the total of all spending on goods and services within our economy, and is used as the key measure of national wealth generation and economic growth. It may be surprising to some, but GDP includes money spent on clearing up natural disasters such as hurricane relief and pollution control. How such expenditures — that really only replace what has been lost — increase national wealth, is beyond me.

Unemployment figures are another worry. Government adjustments for seasonal and population changes are acceptable. But excluding from the unemployment rolls those who are neither actively seeking jobs nor the ‘long-term’ unemployed is not.

Perhaps, the greatest area of concern about statistical manipulation is the measurement of inflation, or Consumer Price Index (CPI). By manipulating this single statistic the government can miraculously transform rising prices into economic growth.

The Department of Labor has set so-called ‘core’ inflation, excluding food and energy, at 2.2%. Even ‘headline’ inflation, including food and energy, is published officially at only some 4%. The problem is that these figures bear very little relation to the reality of price increases experienced on Main Street, which some estimate to be in excess of 10%.

Statisticians assign different weights to the elements comprising the CPI that are often not reflective of the spending habits of ordinary citizens. For example, housing maintenance (including heating oil), a major expenditure, is given only a small part in the Index’s makeup. In addition, the re-pricing of items such as automobiles to allow for added “hedonistic” features such as enhanced ‘value for money’ is wide open to varying judgments. How these statistical decisions are made is really anyone’s guess. But it is absurd to assume that the government’s overwhelming interest in reporting low inflation does not influence the final numbers.

The financial consequences for investors can be severe. For example, the Dow Jones Industrial Average Index, against which many investment returns are measured, closed at a nominal high of 14,093 on Oct. 12, 2007. The media reported it as a sign of good things to come. On May 23, 2008, the Dow closed at 12,480 – off a bit, but apparently not too bad. But if that day’s close is adjusted for the official CPI, then it’s not worth 12,480, but only 9,856 when compared with its previous market cycle high, of 11,723, in the year 2000.

Worse still, if adjusted for the more likely but still conservative inflation rate of 8%, the recent close of 12,480 becomes the equivalent of only 6,742 in the year 2000. What looks like a nominal gain of some 757 points or 6.4% is, in fact, a real loss of 4,981 points or some 42% over those eight years!

One set of statistics that is impossible to distort are currency exchange rates, which have provided a somber report card on America’s economic fortunes. Not able to manipulate these numbers, the authorities instead distort their meaning, and have attempted to convince Americans that a weak dollar is in the national interest.

Those wise enough to ignore the spin, and see the falling dollar for what it is, namely a loss of wealth, have invested in good companies listed on the stock exchanges of producer nations, such as Australia, Canada and Switzerland – all countries with appreciating currencies. Such moves have greatly enhanced wealth and protected those investors against further dollar erosion.