The Parallel Reality of Statistics

<p dir="ltr">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.</p><p dir="ltr">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 <a href="https://www.tradingview.com/economic-calendar/" target="_blank" rel="follow">the US economic calendar</a>.</p><p dir="ltr">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?</p><p dir="ltr">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.</p><p dir="ltr">As the <a href="https://www.wsj.com/finance/investing/frustrating-revisions-to-jobs-data-slow-wall-street-trading-12f0b66" target="_blank" rel="follow">WSJ notes</a>, while the Labor Department's monthly employment data has been solid, each release this year has revised downward from previous reports. This is unprecedented.</p><p dir="ltr">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.</p><p dir="ltr">The problem is that this makes it more difficult to predict future changes in monetary policy and where the economy is headed.</p><p dir="ltr">In addition to the employment data, some even argue that the government, through methodological changes, understates inflation while overstating GDP.</p><p dir="ltr">Can we rely on official data?</p><p dir="ltr">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.</p><p dir="ltr">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.</p><p dir="ltr">Is there any incentive to manipulate the figures?</p><p dir="ltr">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.</p><p dir="ltr">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.</p><p dir="ltr">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.</p><p dir="ltr">So, are they lying to us on purpose?</p><p dir="ltr">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.</p><p dir="ltr">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.</p><p dir="ltr">According to Goldman Sachs, the U.S. Commerce Department does not account for this change, making its <a href="https://www.reuters.com/business/retail-consumer/us-retailers-brace-tough-holiday-season-despite-discounts-2023-11-21/" target="_blank" rel="follow">December retail sales estimates look worse</a>.</p><p dir="ltr">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.</p><p dir="ltr">This smaller sample size increases the margin of error in estimating the data and makes the indicators more volatile.</p><p dir="ltr">Where does it take us?</p><p dir="ltr">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.</p><p dir="ltr">In this regard, it is recommended to use additional sources of information when making decisions, such as checking the <a href="https://www.tradingview.com/scripts/volume/" target="_blank" rel="follow">volume indicator</a> to understand market sentiment.</p>

This article was written by FL Contributors at www.forexlive.com.