No sooner had the Department of Labor announced earlier this month that the economy added 528,000 jobs in July, more than double forecasts and beating each of more than 70 estimates in a Bloomberg survey, than the Economists called the results “noise.” They repeated the word again when the government said on August 10 that the consumer price index was unchanged in July from the previous month, a result that all but four of 63 economists had predicted. They expected a raise. And just this week, we heard many economists respond with “noise” when the Commerce Department said this week that July retail sales among a control group used to calculate GDP rose more than expected. .
This is all very confusing to many, and I understand. But just because the data doesn’t match long-standing Wall Street patterns that worked in the pre-pandemic era doesn’t mean it’s “noise.” This probably means that the models are in dire need of updating.
Take the inflation data. The lack of change in the monthly CPI was surprising, but probably not an outlier. The Bureau of Labor Statistics does a very good job of collecting and analyzing data. If it shows that inflation has remained unchanged, it really means that inflation has slowed down. It also means that we can still debate why inflation has slowed. My go-to theory is that the acceleration in inflation is the result of the lagged effects of fiscal stimulus in response to the shutdowns in the early days of the pandemic, and now that the stimulus is receding into the rearview mirror, price gains will to slow down . The data is what it is, but it can always be subject to interpretation.
The high retail sales figure could also be called “noise”. Retail sales excluding auto purchases rose 0.4% in July, versus a forecast contraction of 0.1% in a Bloomberg survey. Sales in the control group increased by 0.8%, well above the pre-pandemic monthly average of 0.3%. The latest results do not exactly match the narrative that the economy is in recession.
So the options are either to reject data that doesn’t match the numbers spit out by the models, or to apply some intelligence to figure out why the models seem to be getting it so wrong lately. Perhaps consumers are not as affected by inflation as we are led to believe. Perhaps the huge amount of money left in household savings accounts thanks to the unprecedented fiscal stimulus, combined with an unemployment rate that, at 3.5%, represents a 53-year low, means that consumers are generally not discouraged by rising prices.
That’s not to say there isn’t volatility in economic data. There are occasional anomalies. Sometimes seasonality calculations are in error due to an extraordinary event, such as an unexpected government shutdown due to reaching the debt ceiling or a natural disaster. This is why many economists look at moving averages and time series data to get a truer picture of trends.
Everything that’s happening in the economy right now is happening for a reason – a reason that many economists and investors struggle to understand. As I’ve written before, none of the models economists use are helpful in predicting the consequences of an economy that comes to a screeching halt, shedding some 17 million from the workforce in two weeks and contracting 31 % to bounce back just as quickly from the free money government programs that pumped trillions of dollars straight into consumers’ pockets to accompany negative real interest rates and central bank quantitative easing policies. On top of that, global supply chains were massively disrupted, creating shortages of goods, which drove up the prices of those that were available.
It will be several years before all of this is settled and we return to something resembling a normal economic cycle. The broad economic downturn we are experiencing is likely no more than a rollback of the artificially induced strong recovery from the shutdowns. It may not fit the pattern of a conventional business cycle, but once you accept that this is not a normal business cycle and view the data from a different perspective, the unexpected begins to have meaning and not something to dismiss as “noise”. ”
More other writers at Bloomberg Opinion:
• Powell will face a tough crowd in Jackson Hole: Bill Dudley
• The end of the retail recession is good, or maybe bad: Conor Sen
• Walmart signals the end of the supermarket bloodbath: Andrea Felsted
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Jared Dillian is the editor and publisher of Daily Dirtnap. Investment strategist at Mauldin Economics, he is the author of “All the Evil of This World”. He may have an interest in the areas he writes about.
More stories like this are available at bloomberg.com/opinion