The month of January offered those who track the ups and downs of the U.S. economy 92 significant data releases and announcements to digest. That's according to a calendar compiled by the investment bank UBS. The number doesn't include corporate earnings, data from abroad or informal indicators like, say, cardboard prices (a favorite of Alan Greenspan's back in the day).
It was not always thus. "One reads with dismay of Presidents Hoover and then Roosevelt designing policies to combat the Great Depression of the 1930s on the basis of such sketchy data as stock price indices, freight car loadings, and incomplete indices of industrial production," writes the University of North Carolina's Richard Froyen in his macroeconomics textbook.
But that was then. The Depression inspired the creation of new measures like gross domestic product. (It was gross national product back in those days, but the basic idea is the same.) Wartime planning needs and advances in statistical techniques led to another big round of data improvements in the 1940s. And in recent decades, private firms and associations aiming to serve the investment community have added lots of reports and indexes of their own.
Taken as a whole, this profusion of data surely has increased our understanding of the economy and its ebb and flow. It doesn't seem to have made us any better at predicting the future, though; perhaps that would be too much to ask. But what is troubling at a time like this, with the economy on everyone's mind, is how misleading many economic indicators can be about the present.
Consider GDP. In October, the Commerce Department announced — to rejoicing in the media, on Wall Street and in the White House — that the economy had grown at a 3.5% annual pace in the third quarter. By late December, GDP had been revised downward to a less impressive 2.2%, and revisions to come could ratchet it down even more (or revise it back up). The first fourth-quarter GDP estimate comes out Jan. 29. Some are saying it could top 5%. If it does, should we really believe it?
Or take jobs. In early December, the Labor Department's monthly report surprised on the upside — and brought lots of upbeat headlines — with employers reporting only 11,000 jobs lost and the unemployment rate dropping from 10.2% to 10%. A month later, the surprise was in the other direction — unemployment had held steady, but employers reported 85,000 fewer jobs. Suddenly the headlines were downbeat, and pundits were pontificating about the political implications of a stalled labor market. Chances are, the disparity between the two reports was mostly statistical noise. Those who read great meaning into either were deceiving themselves. It's a classic case of information overload making it harder to see the trends and patterns that matter. In other words, we might be better off paying less (or at least less frequent) attention to data.
With that in mind, I asked a few of my favorite economic forecasters to name an indicator or two that I could afford to start ignoring. Three said they disregarded the index of leading indicators, originally devised at the Commerce Department but now compiled by the Conference Board, a business group. Forecasters want new hard data, and the index "consists entirely of already released information and the Conference Board's forecasts," says Jan Hatzius of Goldman Sachs. (The leading-indicators index topped a similar survey by the Chicago Tribune in 2005, it turns out.) The monthly employment estimate put out by payroll-service firm ADP got two demerits, mainly because it doesn't do a great job of predicting the Labor Department employment numbers that are released two days later. And consumer-sentiment indexes, which offer the tantalizing prospect of predicting future spending patterns but often function more like an echo chamber, got the thumbs-down from two more forecasters.
The thing is, I already ignore all these (relatively minor) indicators. I had been hoping to learn I could skip GDP or the employment report. I should have known that professional forecasters wouldn't forgo real data. As Mark Zandi of Moody's put it in an e-mail, "I cherish all economic indicators."
Most of us aren't professional forecasters. What should we make of the cacophony of monthly and weekly data? The obvious advice is to focus on trends and ignore the noise. But the most important economic moments come when trends reverse — when what appears to be noise is really a sign that the world has changed. Which is why, in these uncertain times, we jump whenever a new economic number comes out. Even one that will be revised in a month.