Statisticians took a page out of Marvel’s book and decided to create their multiverse, constantly showing an alternate reality of the current state of the economy.
And it is happening not only in emerging markets but also in developed economies, including the U.S., which deters investors from relying on updates/releases from the US economic calendar.
Are we intentionally misled, or what could be the real explanation for such significant and frequent revisions to the data, especially in the case of the labor market?
To answer this question, we would first have to define the problem, and we will do so with the example of the country once considered the most statistically transparent.
As the WSJ notes, while the Labor Department’s monthly employment data has been solid, each release this year has revised downward from previous reports. This is unprecedented.
From 2013 to 2022, revisions were net positive for four of the ten years and averaged negative 16,000 annually. This year, downward revisions have amounted to 325,000 jobs.
The problem is that this makes it more difficult to predict future changes in monetary policy and where the economy is headed.
In addition to the employment data, some even argue that the government, through methodological changes, understates inflation while overstating GDP.
Can we rely on official data?
We may not have to, but that’s what the Fed is paying attention to. Even if we conclude that the actual CPI is above 5% versus the 2% estimated by the government, it may not mean much.
The good news is that sometimes, it could play into investors’ hands. For example, a more positive inflation report could move the Fed closer to a change in monetary policy.
Is there any incentive to manipulate the figures?
In theory, there could be. For example, from a political point of view, a brighter picture of the economy gives more votes to the ruling party.
On the other hand, on the economic side, it makes it possible to cut annual cost-of-living adjustments for Social Security and other programs.
The problem is that the declining quality of specific statistical indicators in the U.S. makes it even more challenging to analyse the U.S. economy in real-time.
So, are they lying to us on purpose?
Not necessarily. The constant revision of the data could be due not to a conspiracy but because traditional patterns of economic behavior have changed over the years.
For example, Americans used to leave their holiday shopping to the end of the year but now prefer to spread their spending evenly throughout the year.
According to Goldman Sachs, the U.S. Commerce Department does not account for this change, making its December retail sales estimates look worse.
In addition, the response rate among respondents to U.S. statistics is declining. For example, the response rate to the JOLTS has fallen from about 70% a decade ago to 30% at the end of last year.
This smaller sample size increases the margin of error in estimating the data and makes the indicators more volatile.
Where does it take us?
As President Ronald Reagan said: “Trust, but verify”. In parallel, be careful when placing bets based on macroeconomic data, as it can be constantly revised.
In this regard, it is recommended to use additional sources of information when making decisions, such as checking the volume indicator to understand market sentiment.