View I Often Hear: Why Should I Believe the Data Unless It Agrees with My Views?

One benefit of being a nonpartisan observer is listening to everyone while respecting views on both sides of the political aisle, even when those positions are extreme.

Over the past year, I have met many individuals (at my in-person client presentations) who have been hoping for an economic recession, or depression while others have been trying to hold on to optimistic hopes. My position (shared by many other well-known Economists) has always been that hope is not a valuable skill for forecasting economic outcomes.

In a world of polarization, cynical people can be divided into two camps: those who want confirmation of their economic views and those who are so cynical that they don’t believe any of the data released.

Group Seeking Confirmation

These individuals are so anxious to see their preferred economic outcome come to fruition that when an economic statistic disagrees with their view of a weak or strong economy is released; they ignore the data and believe the numbers are fake. On this front, I have asked individuals if the Bureau of Labor Statistics, the Bureau of Economic Analysis, the Federal Reserve, the IRS, or the Census Bureau report false numbers, and the response is that they are all conspiring with each other.

Throughout the years, I have worked as an economist at the Board of Governors of the Federal Reserve System in Washington, DC, the Federal Reserve Bank of NY, and the IRS as an analyst, and I can confidently say that it wasn’t clear to me that I observed much coordination even within departments of those organizations. This suggests that it may be far-fetched to believe that multiple government organizations are working in tandem to release economic and business data that depict a weaker or stronger economy.

However, carrying this view to another level, some individuals in this camp believe that U.S. corporations also report higher or lower corporate profits to portray a stronger or weaker economy. It is easy to be sympathetic to the view that some companies may attempt to understate profits to avoid paying taxes until the government catches up to them but to believe that corporations are conspiring to report higher profits, pay more taxes, and leave less available for CEO salaries and incentives and lower the likelihood that the company’s stock prices will move higher when much of their compensation relies on higher stock prices is hard to fathom.

Cynical Individuals

This group doesn’t believe any of the economic statistics that disagree with their views and argues that the proof of their beliefs is that statistics are often revised. They say this should be enough proof to believe that all statistics are flawed. As a University Professor during the 1980s, I wrote a paper examining whether economic statistics were worsening and found data revisions occurred mainly because flash estimates were released using incomplete data. It should come as no surprise that if a monthly estimate for an economic statistic uses only 60 to 70% of the data, data revisions will be the norm as additional data becomes available.

As a case in point, the response rate for the all-important monthly non-farm payroll employment report has dropped from 63.8% in Feb. 2020 to a low of 53.5% in Jan. 2024. That is the primary reason this report may suffer from outsized data revisions when the government utilizes state unemployment insurance records to revise the data series. Similarly, it is not unusual for the preliminary estimate of Retail Sales to be released using less than 50% of the sample data.

However, I have yet to find evidence of a conspiracy to manipulate the numbers in either direction. It was just a case of the government releasing preliminary estimates of an economic statistic before they had enough data to make a reliable estimate. One solution to this problem is to require U.S. government agencies to delay releasing the data until they have additional data to make the preliminary data releases more accurate. Some government officials told me that Wall Street investors would barbecue them during their July 4th picnic events if they took my suggestion.

Other Cynical Views

A more radical view from one individual at an event I spoke at pointed out that strings of positive and negative revisions are proof of a conspiracy to mislead economy watchers. I have found that data revisions tend to be negative/positive when the economy is slowing/accelerating. So, for my super cynical friends, I advise using the data revisions to improve your view of the economy rather than refuting the statistics. If you believe the economy is weakening/strengthening, look for evidence of consecutive negative/positive data revisions to confirm or refute your views of the U.S. economy.

Finally, an individual from this cynical group pointed out that just because the CPI had slowed from its torrid yearly growth peak of 9.1% in June 2022 to 3.5% in March 2024 didn’t mean we should be complacent because workers have fallen behind. If we index the CPI and Average Hourly Earnings (AHE) to equal 100 in Feb. 2020 (one month before the global pandemic), we can see how the CPI and AHE have risen since that period. Using this data from the Bureau of Labor Statistics data, the headline CPI rose by +20.4% from Feb. 2020 to March 2024, while AHE increased by 21.5%. That means that wage growth has exceeded the growth in inflation.

Yet to some cynics (and I leave it to the reader to pick a side), workers just keeping up with inflation is unacceptable since they are supposed to outpace inflation growth by a wide margin. Others pointed out that auto insurance, which has contributed an outsized +0.6% to the headline yearly growth in the CPI and is currently rising at an annual pace of +22.2%, suggests that the headline number is misleading. Instead, these individuals believe we should measure inflation by the component rising at the fastest pace and ignore the other components rising below the yearly growth rate.

Summary and Concluding Thoughts

It is perplexing when an economic statistic supporting a cynic’s view of a stronger or weaker economy is released, and the person jumps on the soapbox to celebrate the number and tell everyone, “I told you so!” Along the way, these same cynics have typically ignored the economic statistics that don’t support their view.

However, at the end of my in-person presentations, I was glad to find some support for using the Citibank Economic Surprise Index. This index summarizes all the closely monitored government and private economic statistics and measures whether they are coming above or below market expectations. Some, but not all, conceded that this may be a reasonable approach.

When this metric is negative/positive, it suggests that the preponderance of economic and business statistics is below/above consensus estimates, suggesting the economy is weakening/strengthening. This metric has moved higher from the start of the year to its current reading of +40 and is signaling above-trend growth as of April 15, 2024.

So, stay tuned for any dips in this number to reassure those hoping for a severe economic downturn that things are heading in that direction!