We can’t tell how well the U.S. economy is doing. Blame bad data 

With the economy resilient but inflation still stubbornly high, Federal Reserve Board Chairman Jerome Powell prepares to deliver his semiannual Monetary Policy Report to the Senate Banking, Housing and Urban Affairs Committee, at the Capitol in Washington, Tuesday, March 7, 2023. Photo by J. Scott Applewhite/AP Photo.

When discussing the Silicon Valley Bank collapse, it is often pinned on the rising interest rates and questionable economic maneuvering enacted by the Federal Reserve. However one critical element often goes unmentioned when we attempt to assess the choices that lead to economic failures: the data we use.  

We can first look at reporting to the public, where we see weekly mixed reporting on how well our economy is actually doing. From headlines claiming the labor market is booming to the contradictory bank and tech failures like in Silicon Valley, it becomes difficult to make any true judgment on what our economic future looks like.  

In reality, demand for workers is slowing. Recruitment data, an important variable at the frontline of employment, shows that job postings are decreasing, but this statistic has long been an underweighted signal for the labor market. Government data relies more heavily on the unemployment rate and believes that this indicator means the economy is strengthening, prompting the Fed to take initiatives against inflation and continue to increase interest rates. The Fed chooses to look at the leisure and healthcare sector, which indeed saw positive trends the past few months, while not putting the optimal consideration into the massive layoffs at tech companies like Microsoft and Alphabet. Additionally, labor data tends to lag behind and we do not have accurate reports until months later, whereas recruitment data on the other hand more rapidly captures the current state of labor trends. With the decrease in private reports of job openings, a decreased labor demand is no longer meeting the supply of workers, making it hard for individuals to find work.  

The Fed must diverge from its data methodology in light of the warning signs coming from job recruitment, meaning it should instead cut back on inflation in order to balance the volatile position of the labor market instead of continuing on its current interest hikes. There is some good news, however. Goldman Sachs economists report that there will be less wage pressure as job demand increases, leading to higher pay for current employees along with new recruits.  

Still, bad data affects more than just economic policies. Survey results — a crux of economic data — introduces major faults into our information collection and economic evaluation. We are seeing a drop in private surveying that induces a lot of bias into the reporting and creates weaknesses in government data, as reported by the Bureau of Labor Statistics. In particular, larger businesses tend to report on surveys much more frequently than midsize and small businesses, leaving a fracture in our economic perception. On top of this, there are observed infrequencies in wage reporting. 

The amalgamation of data inconsistencies makes predicting inflation vastly difficult. The Fed is focused on their dual mandate: to protect against both job loss and inflation. I’ve long criticized the Fed in their economic management, and I believe their inflation policy needs serious rework as there are large flaws in data we are using for economic evaluation. 

Confidence reporting is important for reaching economic stability. The Treasury maintains that the job market is strong, and there may be some benefits to telling half-lies in order to sustain consumer confidence. Confidence itself functions as a meta-economy and it is an important foundation to all economic theory. However, we may be wading too far into the deep end, where the important details we omit become the main perpetrator to the unwinding of our economy.  

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