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How reliable is U.S. economic data? It's a growing risk for investors awaiting the next Fed rate cut.
Investors have been navigating an increasingly hazy outlook for the U.S. economy, as surveys of consumer sentiment have appeared to clash with so-called hard data regarding the state of the labor market.
Creeping doubts about the quality of U.S. economic reports certainly won't make this task any easier.
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Fresh questions about the reliability of official data surfaced this week, after the Bureau of Labor Statistics said that it had to cut back on some regional collection efforts that were part of the tabulation of the consumer-price index in April, and again in June, because 'current resources can no longer support the collection effort.'
The cutbacks, caused by a federal government hiring freeze, won't impact the headline CPI numbers that investors tend to focus on most closely, the agency said in a statement published on its website — although it could increase the volatility of certain details within the report. A representative for the BLS didn't offer any further comment when contacted by MarketWatch.
See: There's a frenzy in Washington over the accuracy of a key measure of U.S. inflation. Here's what's happening.
The next iteration of the CPI report, which would offer investors the first major insight into the level of inflation in May, is due to be released on Wednesday. Another inflation reading focused on producer prices will follow a day later.
For decades, U.S. economic data were widely considered the most comprehensive and most reliable among major developed economies. But recently, some economists and investors have highlighted what they see as flaws or shortcomings that could impact key economic reports, including labor data like the monthly nonfarm-payrolls report released this past Friday.
'This is a problem that we all kind of know about, but we just kind of ignore it and move forward because perception is reality in this market,' said Eric Pachman, chief analytics officer at Bancreek Capital Advisors, during an interview with MarketWatch on Friday.
The Federal Reserve relies on the personal-consumption expenditures (PCE) price index, a separate inflation gauge, as the basis for its policy decision-making. The central bank outsources the collection of these data to federal statistical agencies.
Given the influence that Fed policy decisions have on financial markets, this could become a problem for investors down the road.
It is not just the BLS's stymied collection method for CPI that is contributing to these doubts. Questions about official methodologies used to calculate certain reports have been percolating for more than a year now, and they found their way back into the conversation on Wall Street this past week.
On Thursday, Steven Englander, head of global G-10 FX research and North American macro strategist at Standard Chartered, published a report highlighting what he described as inconsistencies between the Labor Department's monthly jobs report and a quarterly employment reading that is seen as more reliable, but released with a longer lag.
In the report, Englander said that some of the methods used by the BLS when calculating the monthly figures might be causing this.
Whether or not these issues could lead to a Fed 'policy mistake' that leads to negative consequences for markets and the economy is hard to say, Englander told MarketWatch. The central bank uses a panoply of data to inform its assessments regarding the strength of the labor market and inflation, the two sides of the central bank's dual mandate.
However, if the Fed had access to more accurate data earlier, it might have held off on one of the interest-rate hikes it delivered in 2023 while potentially moving more quickly to cut borrowing costs, Englander said. The central bank ultimately lowered its policy rate in September for the first time since the pandemic.
Many recent monthly reports have seen the headline number that investors tend to focus on later revised lower. When the reading for May was released on Friday, it included downward revisions to data from the prior two months.
Last year, officials revealed that the U.S. economy had added 818,000 fewer jobs than previously reported between the spring of 2023 and the spring of 2024.
Steve Dean, chief investment officer at Compound Planning, warned that the issues with the BLS's collection efforts tied to its inflation reports have cropped up at a particularly inopportune time. Investors and policymakers alike are still struggling to untangle how President Trump's tariffs might impact inflation and the labor market.
'Any reduction in the quality and reliability, and therefore the confidence, in that data makes the Fed's job harder,' Dean, who began his career in economic research at the Fed, told MarketWatch in a statement shared via email.
'This is crucial in the current environment when investors are trying to gauge the balance between inflation and employment and how that will lead the Fed to act,' Dean added in comments shared via email.
Michael Brown, a senior research strategist at Pepperstone, told MarketWatch that concerns about the quality of economic data have been gaining traction recently, and not just in the U.S. Problems with the accuracy of economic data have cropped up in the U.K., where Brown is based.
'Frankly, it's a huge issue,' Brown told MarketWatch via email. 'Every market participant and policymaker (both monetary & fiscal) is relying on data being accurate in order to make the most effective decisions that they can. If one has to question the figures that are being received, then it will clearly lead to those decisions being less effective.'
U.S. stocks finished higher on Friday, with the S&P 500 SPX closing above 6,000 for the first time since February, according to Dow Jones Market Data. The Nasdaq Composite COMP also logged its highest close since February, while the Dow Jones Industrial Average DJIA saw its highest close since May 19.
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