Big Take DC: Economists May Be Using Bad Data to Make Big Decisions

0:00You're being sold an AI future where you're obsolete or irrelevant. That vision is wrong. At Palantir, they're building AI that helps workers and unlocks their full potential. American workers are our nation's greatest strength. AI shouldn't eliminate them. It should elevate them. Palantir is here to tell their stories. From factories to hospitals, AI is freeing people from drudgery, letting them do what humans do best. Create. Solve. Build. Palantir, making Americans irreplaceable.

1:01of the supplier life cycle, helping you deepen merchant relationships. Start fast, grow strategically, and scale at your pace with a modular toolkit you can flexibly deploy. Discover how at mastercard.com slash commercial acceptance. Hello, OddLots listeners. You'll be enjoying an episode of one of our fellow podcasts on the Bloomberg network, Big Take DC. Yep. Hosted by Saleha Mohsen. This episode features one of our favorite guests, economist Claudia Somm. You might remember that we spoke to her back in November about the outlook for the U.S. economy. And Saleha digs even deeper into what's driving things like sentiment consumer surveys versus the hard data right now.

1:46Take a listen. When the government is trying to get a handle on inflation, it's the Federal Reserve that has the biggest lever to pull. Think of the Fed like a traffic cop. Instead of a whistle and cone, the central bank uses interest rates to try and contain inflation. When rates go up, money becomes expensive and people tend to spend and borrow less. That slows the economy down. When rates go down, people are more willing to spend since everything from credit card fees to mortgage rates are cheaper. Unlike the traffic buildup on a road, which anyone can see, the Fed has to get creative in order to manage the economy.

2:26So it uses data to decide when and how to intervene. But last year, when economists everywhere were expecting a full-blown recession, the Fed was raising interest rates over and over again. They needed to rein in inflation. And the man in charge, Chair Jerome Powell, he kept pointing to one category of data that was guiding the Fed's decision. The labor market remains very tight. All this talk about the tight labor market made Claudia Somm's ears perk up. She's an economist and a Bloomberg Opinion contributor. She worked in the Obama White House and spent 12 years at the Fed. She'd been looking into the labor market numbers herself, and the Fed's decisions left her scratching her head.

3:09They are making big decisions about the interest rates, the mortgage rates. We pay the credit card, interest rates, auto loans. So we want them to be data-driven, but they can only do as good a job as the data they have. And that data they've been focused on? She's had some serious questions about it.

3:30This morning, the government released new GDP data that shows the U.S. successfully avoided a recession, even though almost every economist was predicting one. But the data that the Federal Reserve examined as it made policy decisions is complicated. On today's show, have policymakers trusted data that might have been faulty? I talk to Claudia Somm about her findings. And I sit down with Tracy Alloway and Joe Weisenthal from Bloomberg's Odd Lots podcast. We talk about what's behind the numbers and why it's important in an election year. From Bloomberg's Washington Bureau, this is the Big Take DC podcast.

4:10I'm your host, Salaya Mohsen.

4:17Claudia Somm decided her concerns about the Federal Reserve's data were worth voicing. So in November, she wrote an article for Bloomberg Opinion. It had an eye-catching headline. Economists may have been flying blind all along. So the argument I was making when I said economists are flying blind is the awareness that we need to have in terms of the measures, Like how we try and measure, quote unquote, reality and then in our giving policy advice. How we measure, quote unquote, reality? I know that sounds dense, but her point is that as much as we'd love to think that the Fed is making its decisions based on hard numbers, you know, objective, unbiased data, often it's not.

5:03Data doesn't come down from heaven. For example, let's look at that tight labor market that Fed Chair Jay Powell kept mentioning. He said that the labor market was tight, meaning more job openings than workers. He cited numbers from the Job Openings and Labor Turnover Survey, JOLTS for short. Now, that might sound straightforward, right? Measuring the number of open jobs? Not so fast. Now, there was a lot of conversation amongst those of us who have nothing better to do than study data that what a job opening is could be changing over time. Because of the pandemic, the way employers list jobs is just different than it was before.

5:44Especially from work from home, you can put up multiple ones for different geographies because it doesn't matter. So a company might list the same job in several different cities. It doesn't cost them anything, but it does mean that the numbers are getting inflated. So when economists at the Fed were looking at the number of open jobs and basing their assumptions off of what was typical, they were at risk of ignoring one key factor. The world wasn't typical. I wanted to understand just what's going on here and whether it was an issue beyond this one job survey. So I sat down with two of my colleagues.

6:19I'm Tracy Alloway. I am the co-host of the Odd Lots podcast. And I'm Jill Weisenthal, also the co-host of the Odd Lots podcast. Joe and Tracy read Psalm's article and they agreed with her. They do not trust that Joltz data. Pre-COVID, Joltz was a bottom shelf economic indicator. It was the well drinks of, you know, it's like some nerds like to pour over it because there is information on it. But it was not a market mover. If Jolts was a bottom shelf well drink to them pre-COVID, it was basically a cheap shot of bad tequila once the pandemic hit. You just don't know that the patterns of history related to things like job openings, related to things like claims and quits, really mean the same thing in this environment as they might have in past cycles.

7:11If it was a business cycle, it was the weirdest business cycle ever. Companies are behaving differently to how they used to. There's the idea of labor hoarding. People are so scarred from the pandemic period that they just want to make sure they're not caught out again with a labor shortage. So they're just hiring who they can or they're putting out ads to see who responds. I mean, it's pretty easy to place an ad on some digital job site nowadays. It doesn't really cost that much. So why not try and see who you get? So the pandemic threw all our old markers of normal out the window. That left the Jolt survey on pretty and steady ground.

7:49But COVID didn't just mess with jolts. It also did another thing that influences all sorts of important data points that Fed economists rely on. Survey responses, we know they have declined in recent years. So I think something like the housing survey gets like half of the people it surveys actually responding nowadays. And that's down from two thirds. We reached out to the Bureau of Labor Statistics and the Census Bureau for comment for this episode, and they both acknowledged declining response rates as a critical problem that they're trying to address. It's a problem that only got worse during the pandemic.

8:29All this matters, because if your survey only captures half of the people you contact, you're going to have to question whether or not that 50 percent is reflective of the actual American experience. experience. And of course, the irony is that most advanced economies are collecting more data than ever. We're doing more soft surveys than ever. But the response rates are trending down and the quality of that data is questionable. We'll get to why Americans are getting survey shy, what the Fed is doing to fix it and what it all means for the 2024 election after the break.

9:13Silicon Valley is selling you a future where you're obsolete, or worse, identical. At Palantir, they're witnessing something different and revolutionary. From re-industrializing the nation's defense base to shipyard workers building faster and frontline workers boosting productivity, AI is transforming work across the nation. AI is not replacing American workers or flattening them into conformity. It's unleashing what makes each one irreplaceable. Their judgment, their craft, their creativity. When American workers become more powerfully themselves, they own the future. Palantir, making Americans irreplaceable.

9:55Support for the show comes from Public.com. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic option plays on the side. The point is you're engaged with your investments and Public gets that. That's why they built an investing platform for those who take it seriously. On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus an industry-leading 3.6 % APY, high-yield cash account. Switch to the platform built for those who take investing seriously.

10:28Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S. listed registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc. Member FINRA and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures.

10:57We're back. Part of what made Claudia Assam argue that economists may have been flying blind is lower response rates to government surveys. And that decline is actually a symptom of a much bigger problem. We've seen a growing distrust in government. And, you know, I can understand if you don't trust the government, if they show up and be like, hey, tell us all about your wealth and your debt and how much income you make, which for a lot, these are very sensitive topics. Peer research found that two-thirds of adults think the risk of responding to a survey outweighs the benefits. They're concerned about things like privacy and not so concerned about the consequences of low response rate data.

11:37Psalm says they should be. You need to rebuild that relationship and help people understand, know what you tell us. Like policymakers, this is important. And if we don't know what's going on in your life, then it's almost guaranteed that the policy just can't address the issues. We're in an election year, one when Americans list the economy as the top issue driving their votes. So flawed assumptions about the economy based on sketchy data carry a risk as people decide who they want as president. And so does data that doesn't fully capture voters' lived experiences. I asked Joe and Tracy from OddLots about all that.

12:18It kind of feels like the worst timing to have bad data or questionable data when there is such a consequential election at hand. So I'm curious what you guys think. How do you think potentially flawed data is going to affect all of this? One of my favorite surveys to read through is the NFIB Small Business Optimism Survey. And there's one chart that really catches my eye in which the NFIB itself disambiguates between what they call the hard data and the soft data. So the hard data is like, were your sales higher or lower in the last three months? It's not really an opinion question. Either it was or it wasn't.

12:57And so you answer. And then there's the soft data. It's like, do you feel confident enough to invest in this environment? What's really interesting is that the hard data and the soft data really do converge during past Republican administrations and really do diverge during Democratic administration. So there's a huge gap right now within the NFIB between their soft and hard data. So I do think that there is a split in sort of how people perceive the economy versus how people perceive their own household finances. That is sort of interesting. How do people vote on this? You know, it's hard to say.

13:35To that point, I kind of think about it on a sort of personal versus like absolute basis, which is you do see a lot of self-reporting. So people talking about their own financial circumstances or, to Joe's point, about small businesses, their own small business circumstance, they will say it's going relatively well. And you can see some of that borne out in the hard data. But when they talk about the economy in aggregate, that's when you tend to see a lot more negative sentiment. And there is a sort of weird cognitive dissonance there. We can talk about like whether that might be down to partisanship, down to the media, things like that.

14:13But I do think the interesting question is if everyone keeps saying they think the economy is doing terribly, is that actually going to manifest in a slowdown in growth or even a contraction at some point? We haven't seen that yet. That's significant. A lot of people this time last year were looking at government data and saying we're headed straight for a recession. But it turns out all this flawed data isn't just affecting the Fed's decisions. It also goes the other way. As in Fed decisions, like raising interest rates, also shape the narratives that economists construct about the state of the economy.

14:50The consensus position going into 2023 was that we were going to see a recession, that it was impossible to have the extent of the rate hikes that we had seen without having some sort of slowing or negative effect on the economy. The story is you make money more expensive. That decreases the ability to invest and borrow. That causes people to lose their jobs. Lost jobs mean less demand. Less demand means lower prices. That is the basic causal chain between how higher rates causes low inflation. It's sort of the standard popular telling of how economics work. The idea that prices could come down without spiking unemployment was just absolutely outrageous.

15:36Sort of this time last year. And yet what we've seen is exactly that. Janet Yellen, who serves as President Joe Biden's Treasury Secretary, called it a soft landing. No pun intended. In other words, if the economy is a plane, it didn't crash. So what does all this mean about Somm's argument? How can we make sense of the data we have and the stories economists are telling us about it? Maybe one way to think about it is if you're going to extend the flying analogy, it's terrible weather and it's cloudy and it's raining and there's wind from multiple directions and they're landing in an area with a lot of snow and a valley.

16:16It's really tough to know what's going on. And what's striking is the degree of narratives that I could tell you right now about what's happening with the economy. I could tell you a story about how inflation is coming down and the labor market is still robust and we're on pace for a soft landing. I could say there are certain measures of inflation that aren't coming down as much. And there are signs that the labor market is actually weakening. I could say, look at what's going on with financial market speculation and say, look, actually, we haven't extinguished the inflationary embers at all in this economy.

16:47And so any one of those narratives, someone could convincingly make the case. It is extremely hard for the Fed to really know what's going on. Yeah, if there was no uncertainty, there would be no market, basically. And not to labor the flying analogy, but I think the trick is that, yes, it's stormy outside, but you're flying a plane. You have all these different indicators. You know, you can look out the windscreen and see what the weather actually looks like. You can look at your instruments and measure wind shear or whatever. you sort of have to figure out which of your instruments to listen to at this moment in time.

17:24And it's tricky because it's not the usual flying environment. Gosh, I'm getting sick of this analogy. But it is a weird business cycle going back to what we were saying earlier. Sam was very clear in her article. The Federal Reserve is doing the best it can. We're trying to get a sense on a$20 trillion plus economy with, you know, hundreds of millions of people working and business. We're like trying to measure a moving target. But she does think the government overall could do more to restore trust so that people are more willing to respond to surveys. And she's also been involved in efforts to bridge the gap between that hard and soft data that Joe mentioned by relying on both.

18:07There are ways to use administrative data where you could put together like surveys where we ask people things that would be really hard to go measure somewhere else. But then maybe from the Internal Revenue Service, we know their income. And it's definitely easier than figuring out how to get people to trust the government more. Somm says there's an urgent need to address these problems before they get worse. Statisticians have looked at this and, you know, people that research in this area and they still feel comfortable with the degree of quality, accuracy. Like there are ways to get a sense of the reliability.

18:46And they're still in a place where it's like, OK, we feel comfortable with these. And yet survey response rates that continue to go down, right, at some point you cross a threshold of being reliable.

19:04Thanks for listening to the Big Take DC podcast from Bloomberg News. I'm Saleha Mohsen. This episode was produced by Alex Sugiera, Julia Press, and Naomi Shaven. It was fact-checked by Stacey Renee. A special thanks to Kate Davidson and Matt Bosler. Blake Maples is our mix engineer, and our story editors are Michael Shepard and Wendy Benjaminson. Nicole Beamsterbower is our executive producer. Sage Bauman is our head of podcasts. If you like what you heard, please be sure to subscribe, rate, and review the show. It'll help other listeners find us. Thanks for tuning in. I'll be back next week.

20:28As a contractor, I don't pay for materials I don't use. So why would I pay for stuff I don't need in my mobile plan? That's why MyBizPlan from Verizon Business is so perfect. Now I can choose exactly what I want, and I only pay for what I need. Right now, with MyBizPlan, get our best price. As low as$25 a line. Visit verizon.com slash business to get started today. New lines only. Price per month with 5 plus lines. Includes auto pay and paper free billing and promotional discount. Taxes, fees, economic adjustment charge, applicable add-ons, prices, and terms apply. Guarantee applies to base monthly rate and stated discounts only.

20:57Add-on prices additional. Offers in January 5th, 2026.