For some time now we have heard the Federal Reserve talk about crafting monetary policy based on “the data.” What no one really talks about is how economic data is interpreted and used to guide monetary policy, and why certain data is more important than others. The Fed has tried for 25 years to be more transparent, and to some extent it has worked.
However, when the Fed moves the goal posts to satisfy a certain policy, it gets a little harder to trust the data or how it’s interpreted. Let us face it, economic data is left to interpretation by everyone and opinions run the gamut. But we only have one Federal Reserve and they interpret the data in their own way. It may be imperfect, but it’s all we got.
So what is it about the data that gets everyone excited? Why does the market move so much when certain data points are finally released?
I think much of it is driven by anticipation and hope. When the Consumer Price Index (CPI) report shows a hot inflation number one month, but then the next month it is cooler, traders and investors will react. Is that differential really a pivot? One number does not make a trend, but when markets are struggling, people will grab onto any good news that’s available.
This is the economic data the Fed uses
The Fed isn’t as reactive as the markets, of course. They wait for a trend to be confirmed before making a move. Below is a snapshot of the economic data the Fed and other economists watch.
Gross Domestic Product (GDP)
The Fed looks at numerous data points that make up the GDP. So what contributes to growth in GDP? Retail sales, industrial production, manufacturing data (particularly the ISM and PMI), regional manufacturing indices, and The Fed’s Beige Book. (The Beige Book is actually a report that’s published eight times per year. It includes anecdotal information on current economic conditions in each Federal Reserve Bank’s district.)
Jobs
Jobs data provides vital information that helps determine the health of the economy and inflationary trends. Non-farm payroll (NFP) is the biggest estimate of job growth, while jobless claims, layoff data, job openings, and the ADP National Employment Report provide data points around the edges. The Fed also looks at productivity, unit labor costs, and wage growth statistics.
Housing
Housing statistics are extremely important data points for all economists. They look at housing starts, permits, units sold, prices, and inventory levels.
Sentiment
Sentiment data includes consumer confidence, leading indicators, polling data, and surveys. Though it is not hard data, these do tend to trend in a direction that guides the Fed’s decisions.
When you’re trying to make sense of economic data, leave bias out of your interpretation. They are just numbers, after all. Do this, and you’ll get a good read on the economy and future Fed policy.
