Economists Could Be Using Bad Data to Make Big Decisions

Published Jan 25, 2024, 9:41 PM

Last year, as the US Federal Reserve kept raising interest rates to rein in inflation, Chair Jerome Powell kept pointing to one category of data that was guiding its decision: The labor market. But it’s possible that the labor market data-of-choice may have been faulty.

Having a clear picture of how Americans are really doing is crucial during a presidential election cycle. Bloomberg’s Saleha Mohsin talked with Claudia Sahm, an ex-Fed economist, and with Odd Lots podcast hosts Joe Weisenthal and Tracy Alloway about whether economists have the best data to make key decisions about the US economy.

When the government is trying to get a handle on inflation, it's the Federal Reserve that has the biggest lever to pull. Think of the FED like a traffic cop instead of a whistle and cone. The central Bank uses interest rates to try and contain inflation. When rates go up, money becomes expensive and people tend to spend and borrow less. That slows the economy down. When rates go down, people are more willing to spend since everything from credit card fees to mortgage rates are cheaper. Unlike the traffic build up on a road which anyone can see. The FED has to get creative in order to manage the economy, so it uses data to decide when and how to intervene. But last year, when economists everywhere were expecting a full blown recession, the FED was raising interest rates over and over again. They needed to rain in inflation, and the man in charge, chaired your own Powell. He kept pointing to one category of data that was guiding the Fed's to stay the labor market.

A labor market, A labor market remains very tight.

All this talk about the tight labor market made Claudia Sam's ears perk up. She's an economist and a Bloomberg Opinion contributor. She worked in the Obama White House and spent twelve years at the FED. She'd been looking into the labor market numbers herself, and the Fed's decisions left her scratching her head.

They are making big decisions about the interest rates, the mortgage rates we pay, the credit card interest rates, auto loans, so we want them to be data driven, but they can only do as good a job as the data.

They have, and that data they've been focused on, she's had some serious questions about it. This morning, the government released new GDP data that shows the US successfully avoided a recession, even though almost every economist was predicting one. But the data that the Federal Reserve examined as it made policy decisions is complicated. On today's show, have policymakers trusted data that might have been faulty? I talked to Claudia sam about her findings, and I sit down with Tracy Alloway and Joe Wisenthal from Bloomberg's Odd Lots podcast. We talk about what's behind the numbers and why it's important in.

An election year.

From Bloomberg's Washington Bureau, This is the Big Take DC podcast I'm Your host Seleiah Mosen Claudia Sam decided her concerns about the Federal Reserves data were worth voicing, so in November she wrote an article for Bloomberg Opinion. It had an eye catching headline, economists may have been flying blind all along.

So the argument I was making when I said economists or flying blind is the awareness that we need to have in terms of the measures like how we try and measure quote unquote reality, and then in our giving policy advice.

How we measure quote unquote reality.

I know that sounds dense, but her point is that as much as we'd love to think that the FED is making its decisions based on hard numbers, you know, objective, unbiased data, often it's not.

Data doesn't doesn't come down from heaven.

For example, let's look at that tight labor market that FED Chair J. Powell kept mentioning. He said that the labor market was tight, meaning more job openings than workers. He cited numbers from the Job Openings and Labor Turnover Survey JOLTS for short. Now that might sound straightforward, right, measuring the number of open jobs.

Not so fast.

Now, there was a lot of conversation those of us who have nothing better to do than study data. What a job opening is could be changing over time because of the pandemic.

The way employers list jobs is just different than it was before.

Especially from work from home. You can put up multiple ones different geographies because it doesn't matter.

So a company might list the same job in several different cities. It doesn't cost them anything, but it does mean that the numbers are getting inflated. So when economists at the FED were looking at the number of open jobs and basing their assumptions off of what was typical, they were at risk of ignoring one key factor.

The world wasn't typical.

I wanted to understand just what's going on here and whether it was an issue beyond this one job survey. So I sat down with two of my colleagues.

I'm Tracy Alloway, I am the co host of the auth Lots podcast.

And I'm Jill Wasenthal, also the co host of the Outlots podcast.

Joe and Tracy read Sam's article and they agreed with her. They do not trust that jolt data.

Pre COVID jolts was a bottom shelf economic indicator. It was the well drinks of you know, it's like some nerds like to pour over it because there is information on it. It was not a market mover.

If Joelts was a bottom shelf well drink to them pre COVID, it was basically a cheap shot of bad tequila. Once the pandemic hit.

You just don't know that the patterns of history related to things like job openings, related to things like claims quit really mean the same thing in this environment as they might have in past cycles.

If it was a business cycle, it was the weirdest business cycle ever. Companies aren't behaving differently to how they used to. There's the idea of labor hoarding. People are so scarred from the pandemic period that they just want to make sure they're not caught out again with a labor shortage, so they're just hiring who they can, or they're putting out ads to see who responds. I mean, it's pretty easy to place an ad on some digital job site nowadays. It doesn't really cost that much, so why not try and see who you get?

So the pandemic through all our old markers of normal out the window that left the Jolt survey and pretty and steady ground. But COVID didn't just mess with jolts. It also did another thing that influences all sorts of important data points that FED economists rely on survey responses.

We know they have declined in recent years, so I think something like the Housing Survey gets like half of the people it surveys actually responding nowadays, and that's down from two thirds.

We reached out to the Bureau of Labor Statistics and the Census Bureau for comment for this episode, and they both acknowledged declining response rates as a critical problem that they're trying to address. It's a problem that only got worse during the pandemic. All this matters because if your survey only captures half of the people you contact.

You're going to have to question whether or not that fifty percent is reflective of the actual American experience. And of course, the irony is that most advanced economies are collecting more data than ever. We're doing more soft surveys than ever, but the response rates are trending down and the quality of that data is questionable.

We'll get to why Americans are getting survey shy, what the FED is doing to fix it, and what it all means with a twenty twenty four election.

After the break, we're back.

Part of what made Claudia Sam argue that economists may have been flying blind is lower response rates to government surveys, and that decline is actually a symptom of a much bigger problem.

We've seen a growing distrust in government. And you know, I can understand if you don't trust the government, if they show up and be like, hey, tell us all about your wealth and you're dead and how much income you make, which for a these are very sensitive topics.

Pere research found that two thirds of adults think the risk of responding to a survey outweighs the benefits. They're concerned about things like privacy and not so concerned about the consequences of low response rate data.

Some says they should be, but you need.

To rebuild that relationship and help people understand know what you tell us, Like policy makers, this is important and if we don't know what's going on in your life, then it's almost guaranteed that the policy just can't address the issues.

We're in an election year one when Americans list the economy as the top issue driving their votes. So flawed assumptions about the economy based on sketchy data carry a risk as people decide who they want as president, and so does data that doesn't fully capture voters lived experiences. I asked Joe and Tracy from Odd Lots about all that it kind of feels like the worst timing to have bad data or questionable data when there's such a consequential election at hand. So I'm curious what you guys think. How do you think potentially flawed data is going to affect all of this.

One of my favorite surveys to read through is the NFIB Small Business Optimism Survey, and there's one chart that really catches my eye in which the NFIB itself disambiguates between what they call the hard data and the soft data. So the hard data is like, we're your sales higher or lower in the last three months. It's not really an opinion question either it was or what I was it into your answer. And then there's the soft data. It's like, do you feel confident enough to invest in this environment. What's really interesting is that the hard data and soft data really do converge during past Republican administrations and really do diverge during democratic administration, So there's a huge gap right now within the NFIB between their soft and hard data. So I do think that there is a split. It's sort of how people perceive the economy versus how people perceive their own household finances. That is sort of interesting. How do people vote on this? You know, it's hard to say to that point.

I kind of think about it on a sort of personal versus like absolute basis, which is you do see a lot of self reporting, so people talking about their own financial circumstances, or to Joe's point, about small businesses, their own small business circumstance, they will say it's going relatively well, and you can see some of that born out in the hard data. But when they talk about the economy in aggregate, that's when you tend to see a lot more negative sentiment, and there is a sort of weird cognitive dissonance there. We can talk about like whether that might be down to partisanship, down to the media, things like that. But I do think the interesting question is if everyone keeps saying they think the economy is doing terribly, is that actually going to manifest in a slowdown in growth or even a contraction at some point, we haven't seen that yet.

That's significant a lot of people. This time last year, we're looking at government data and saying we're headed straight for recession. But it turns out all this flawed data isn't just affecting the Fed's decisions. It also goes the other way, as in FED decisions like raising interest rates also shape the narratives that economists construct about the state of the economy.

The consensus position going into twenty twenty three was that we work on to see a recession, that it was impossible to have the extent of the rate hikes that we had seen without having some sort of slowing or negative effect on the economy.

The story is, you make money more expensive, that decreases the ability to invest and borrow. That causes people to lose their jobs. Lost jobs mean less demand. Less demand means lower prices. That is the basic causal chain between how higher rates causes low inflation. It's sort of the standard popular telling of how economics work.

The idea that prices could come down without spiking unemployment was just absolutely outrageous sort of this time last year, and yet what we've seen is exactly that.

Janet Yellen, who serves as President. Joe Biden's Treasury secretary called it a soft landing, no pun intended. In other words, if the economy is a plane, it didn't crash. So what does all this mean about Palm's argument? How can we make sense of the data we have and the stories economists are telling us about it.

Maybe one way to think about it is, if you're going to extend the flying analogy, it's terrible weather, and it's cloudy, and it's raining, and there's wind from multiple directions, and they're landing in an area with a lot of snow and a valley. It's really tough to know what's going on. And what's striking is the degree of narratives that I could tell you right now. But what's happening with the economy. I could tell you a story about how inflation is coming down and the labor market is still robust, and we're on pace for self landing. I could say there are certain measures of inflation that aren't coming down as much, and there are signs that the labor market is actually weakening. I could say look at what's going on with financial market speculation and say, look, actually we haven't extinguished the inflationary embers at all in this economy, and so any one of those narratives someone could convincingly make the case it is extremely hard for the Fed to really know what's going on.

Yeah, if there was no uncertainty, there would be no market basically, and not to labor the flying analogy, but I think the trick is that, yes, it's stormy outside, but you're flying a plane. You have all these different indicators. You know, you can look out the windscreen and see what the weather actually looks like. You can look at your instruments and measure windshar or whatever. You sort of have to figure out which of your instruments to listen to at this moment in time. And it's tricky because it's not the usual flying environment. Gosh, I'm getting sick of this analogy. But it is a weird business cycle. Going back to what we were saying.

Earlier, Some was very clear in her article the Federal Reserve is doing the best it can.

We're trying to get a sense on a twenty trillion dollar plus economy with you know, one hundreds of millions of people working, and we're like trying to measure a moving target.

But she does think the government overall could do more to restore trust so that people are more willing to respond to surveys, and she's also been involved in efforts to bridge the gap between that hard and soft data that Joe mentioned by relying on both.

There are ways to use administrative data where you could put together like surveys where we ask people things. It would be really hard to go measure somewhere else, but then maybe from the Internal Revenue Service, we know they're income and it's definitely easier than figuring out how to get people to trust the government more.

Sam says there's an urgent need to address these problems before they get worse.

Statisticians have looked at this, and you know, people that research in this area and they still feel comfortable with the degree of quality accuracy, Like there are ways to get a sense of the reliability, and they're still in a place where it's like, Okay, we feel comfortable with these, and yet survey responsorates that continue to go down. Right, at some point you cross a threshold of being reliable.

Thanks for listening to The Big Take DC podcast from Bloomberg News. I'm Salaia Mosen. This episode was produced by Alex Sugia, Julia Press, and Naomi Shaven. It was fact checked by Stacy Renee. A special thanks to Kate Davidson and Matt Bosler. Blake Maples is our mixed engineer, and our story editors are Michael Shepherd and Wendy Benjaminson. Nicole Beemster Bower is executive producer. Sage Bauman is our head of podcasts. If you like what you heard, please be sure to subscribe, rate, and review the show. It'll help other listeners find us. Thanks for tuning in.

I'll be back next week.

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