Fed relies on questionable data to chart course for economy

This means that as Fed officials brace for another oversized interest rate hike that could cause convulsions in the economy and markets, they are doing so without having a clear line of sight to their target. This uncertainty increases the risk that they will do too much – triggering a severe recession – or too little, prolonging searing inflation and making it harder to defeat.

The Fed is “assembling a puzzle where the pieces have been cut wrong and they just don’t fit together,” said David Wilcox, who led the central bank’s research division from 2011 to 2018. economy today and in which direction? is it directed? All of our measures, however rich, offer only an imperfect and somewhat outdated perspective on these key issues.

An illustration: When the Fed raised rates in June, it opted for the biggest hike in nearly 30 years, a move that Powell said was partly based on indications that consumers had raised their expectations about future inflation. Shortly after the Fed’s decision, this data was revised to suggest that expectations had in fact not changed much.

Behind the confusion hides the extraordinary upheaval that the country has gone through in recent years. The economy has been deeply disrupted by the pandemic, price spikes not seen in decades, unexpected supply chain issues and Russia’s war in Ukraine. This makes the most recent data both more important and less reliable.

Routine adjustments based on seasonal factors are now much more difficult as forecasters attempt to analyze what data indicates the economy is slowing, what is just failing, and what indicates more structural transformations in the society.

“The economy has changed,” said Nela Richardson, chief economist at payroll processing firm ADP. “It was tilted off axis, and we don’t know at what angle it was tilted.”

Even in the best of times, real-time measures of economic health are imperfect. Government inflation and employment data are released with a lag, then updated over time as better information becomes available. The broadest measure of economic activity – gross domestic product – is compiled using a multitude of data sets which are then individually revised.

After a strong labor report earlier this month, Atlanta Fed President Raphael Bostic told CNBC that the economy still looks strong — despite real-time forecasts released by his own regional arm. from the Fed suggesting that GDP growth was negative in the second quarter. If this forecast is supported by official government estimates on July 28, after a similar decline in the first quarter, it would meet a technical definition of a recession.

Yet GDP numbers often undergo heavy revisions, even years later, as more accurate data is finalized, such as information from Internal Revenue Service tax filings and annual industry surveys. manufacturer. And many of the factors that have contributed to the contraction in GDP over the past few months are technical in nature – businesses have stockpiled goods for their back rooms and therefore are not adding as much to that inventory, or the dollar will fall. is strengthened, making imports cheaper and fueling the trade deficit.

Fed Governor Christopher Waller, in a recent speech, said he still doesn’t place too much importance on the GDP numbers.

“While real GDP in the first quarter is now estimated to have fallen 1.6%, according to another estimate, real gross domestic income rose 1.8%,” he said. “GDP and [gross domestic income] basically measure the same activity in different ways, and in the past when such large discrepancies between the two numbers have initially appeared, they tend to get closer when the data is finalized.

At the same time, while some important indicators are more easily quantifiable, such as industrial production, others, such as the value of technological innovation, are less so. Real-time employment data collected in Labor Department surveys has recently been affected by declining business response rates, while consumer expectations for inflation have become murkier as the range of opinions is much broader than before.

“All data is fragile in its own way,” said Skanda Amarnath, executive director of labor advocacy group Employ America.

For now, Fed policymakers appear confident that the economy is still fundamentally sound, suggesting they rely more on labor market data, which is generally a clearer and quicker indicator of the health of the economy as a whole. But even here, there are indications that layoffs have started to increase and wage growth has started to slow. On Thursday, the Labor Department said initial jobless claims stood at 251,000 the previous week, the highest level since mid-November.

“You have to understand, what should I infer from this data?” said Claudia Sahm, another former Fed economist who is now a senior fellow at the Jain Family Institute. “As you get more and more pieces of data, you look at it and say, does this fit my story? And if you get enough information that doesn’t match, you rewrite history.

One way the Fed is trying to overcome data gaps is by collecting information from many different sources, said Wilcox, now an economist at the Peterson Institute for International Economics and Bloomberg Economics.

For example, information from map processor First Data can be used to identify regional factors in national retail sales figures, which provide insight into the strength of consumer spending – a key variable in forecasting inflation. . The central bank also uses data from ADP, which tracks the actual wage transactions of 26 million businesses, to supplement the Department of Labor’s employment surveys to gain a broader view of the labor market.

ADP’s Richardson said the company is also revamping its national employment reports to make them more frequent and independent of government data; it will no longer attempt to forecast the monthly government jobs report.

Consumer sentiment surveys conducted by the University of Michigan and the Conference Board are unusually divergent. Interpreting these signals is important because declining sentiment is almost always a reliable indicator of when the economy may soon be entering a recession.

“We’re in a situation where labor markets are really strong, and we’re also in a situation where inflation is really bad,” said University of Michigan survey director Joanne Hsu, who has recently reached record highs.

“Our Consumer Confidence Index is a place where consumers go to tell us about their complaints about inflation,” she said, as the Conference Board survey more strongly reflects continued optimism among Americans. regarding the labor market. That optimism is likely why consumer spending has remained strong even amid widespread sluggishness, she added.

“We are coming out of a situation where over a million people have died, and there have been economic lockdowns, and we are in a time of incredible political polarization which is affecting people’s feelings about the country” , she added. “We have no historical precedent for this.”

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