Beware the economic data fog

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Monday, May 17, 2021

Cross-currents make economic data hard to predict and hard to interpret

There's a lot of excitement about the economy as the distribution of COVID-19 vaccines and loosening of restrictions across the country allows more and more people to go about their lives like they did before the pandemic.

And while recent data show how strong demand is right now, a plethora of unusual crosscurrents has made it incredibly difficult for professional forecasters to predict current levels of economic output with a high degree of confidence.

"Forecasting is hard, particularly April," JPMorgan economists acknowledged on Friday.

We've quickly gone from an economy on an unprecedented lockdown triggered by a pandemic to one that's rapidly reopening with the ongoing distribution of vaccines. And that rush of demand for goods and services has also been met with supply chain bottlenecks as it takes time to get suppliers back online.

Issues on the supply side include labor shortages due to concerns about personal safety, childcare problems, accelerated retirements, workers on furlough awaiting to be recalled by their employers, and potential distortions due to enhanced unemployment benefits.

Let's also not forget the additional spending capacity thanks to stimulus checks and an elevated personal saving rate. Also, tax day was also moved from April 15 to May 17.

"It's really hard to parse through it all and figure out what the consumer is really thinking," said Moody's analyst Charlie O'Shea in an appearance on Yahoo Finance Live last week.

Economic forecasters were juggling all these variables as they predicted retail sales would grow by 1% from March to April. And yet when we learned on Friday that the growth rate was actually 0%, many were quick to conclude this was a disappointment.

"You know, calling it a miss is kind of tough," O'Shea said. "This is just the most unique retail environment I think I've experienced in my career. And that's going back a long time. I don't know that we're going to be able to glean anything meaningful when we start looking at month over month comps or month by month comps, given all the dynamics going on in the economy."

"[I]n truth there were so many cross-currents in April that all forecasts were made with crossed fingers," Pantheon Macroeconomics Ian Shepherdson said.

Atypically uninformative

Credit Suisse economist James Sweeney really drove the challenges of the current environment in a note published following April's U.S. employment report that some forecasters called the biggest disappointment ever.

"Investors are suffering from a data fog: some incoming high-frequency data are atypically uninformative; forecast errors are larger than usual; and unhinged narratives are circulating freely, as observers cherry pick numbers to fit stories," Sweeney said.

"One key question facing investors and policymakers now is about how high US inflation will go and how persistent elevated inflation will be," Sweeney said. "But inflation data are now being thrown higher by base effects, and ubiquitous anecdotes suggest businesses are struggling to hire and in some cases raising wages. US average hourly wage data, which have suffered from pandemic-related composition effects, might give little help signaling wage pressure.

"In the near term inflation and wage data are unlikely to resolve this debate, but perhaps by mid-summer, when stimulus checks are long since sent, clarity could emerge," he added. "For the time being, investors must navigate the fog."

By Sam Ro, managing editor. Follow him at @SamRo

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