Navigating financial markets requires a reliable set of instruments. Unfortunately, the pandemic exposed the shortcomings of even the most long-running data series. We have to accept that our statistical indicators have struggled to keep up with the pace of technological change, and have to adjust our course accordingly. It’s time to move from log tables to GPS.
The normally staid world of statistics was rocked by US president Donald Trump conducting yet another round of his reality-television show The Apprentice, when he fired the US commissioner of labour statistics. However, the US bureau of labour statistics (BLS) had already been struggling for some time. Over the last 18 months, it has “inadvertently” released inflation data early, posted the annual employment revisions late and informed some financial institutions (referred to by a BLS employee as “super users”) about details in the data that others might have missed. It has been a torrid time, even before Trump’s return.
At least the president is grasping the nettle of change. The UK remains without a permanent “national statistician”, after the prior holder, Sir Ian Diamond, resigned early for health reasons. The UK also remains without its main employment indicator ever since the Labour Force Survey (LFS) was withdrawn in October 2023. Its replacement might not be ready until 2027. The Bank of England has been left to cobble together its own version as the monetary policy committee unsurprisingly “continues to place less weight” on the official LFS data.
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The problem with the data comes down to how it is collected. A letter is sent to households and then followed up by a phone call or an in-person interview. During Covid, this led to the response rate falling as low as 17%, but it has failed to recover enough to ensure the data is reliable. Who would respond to a phone call in the modern world – let alone a letter?
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A small miscalculation can cost a lot
It’s not just citizens who cannot be relied upon. The Office for National Statistics (ONS) had to announce that April’s UK CPI data was inflated by 0.1 percentage points owing to an error in vehicle excise duty provided by the Department for Transport. Someone, somewhere in some spreadsheet, had overstated the number of vehicles subject to this duty in their first year of registration. On such small miscalculations can our navigation plot the wrong course; fortunes can be won or lost. The yield on short-dated index-linked gilts moved by several basis points on entirely the wrong information. Financial markets are volatile enough without supposedly reliable data adding to the confusion.
Statistics are supposed to be the signal within the noise: staging posts around which we divine where the path ahead lies. But what if we are looking at the completely wrong map? The world has changed utterly in the last five years. We were already in the midst of a multi-decade “technological revolution” when Covid arrived and accelerated the paradigm shift. Working remotely and conducting relationships entirely virtually encouraged resources to be deployed into fresh technology such as AI. With each step forward in computational power, we have taken a leap forward in our evolution.
In the new world, it makes less sense to monitor indicators such as the manufacturing cycle. Investors have long referred to the US ISM Manufacturing data as a bellwether for the US economy: it has been available since 1945 and has demonstrated a strong correlation with the US business cycle. With economics only a social science, experiments cannot be repeated in laboratory conditions – but a survey running for eight decades is about as good as it gets... until a once-in-a-century pandemic forces the economy to shut down and re-open again.
In one year, the ISM Manufacturing number plunged to a 12-year low and then surged to a 40-year high. A survey is only a sentiment indicator, not a hard gauge of activity. Firms went from staring disaster in the face to sheer relief once the fear wore off and vaccines emerged. There was no business cycle, no smooth journey from bust to boom. It was simply a shock. The ISM data told us very little about it.
We are still living through the consequences of that shock as the economy finds a new post-Covid equilibrium. Physical borders have been reimposed as technology spreads intangibly between consumers all over the globe. Indebted governments of ageing nations are struggling to marshal ever more scarce resources towards the drivers of growth. A basis point on unemployment or inflation no longer makes the marginal difference. The old data we have relied on for decades is making it harder to spot the path ahead.
Technology should make it easier to update, collect and disseminate information in a quick, clear and fair fashion. Real-time updates could come from Google mobility data, aggregated credit-card spending, LinkedIn and Indeed job postings, energy usage, or even satellite imagery of carparks and warehouses. If we can order food, taxis and romantic partners from an app in the palm of our hand, then technology companies should be able to publish aggregated activity data fairly easily. Losing trust in statistics will leave us all at sea. Technology ensures we can recalibrate before we drift too far off course.
Helen Thomas is the founder and CEO of Blonde Money, a macroeconomic consultancy.
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