Parsing Out the Data

For some time now we have all become accustomed the language of the Federal Reserve, as they talk about crafting policy based on 'the data'.  But what is difficult to understand is how this data is interpreted and used for 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 you move the goal posts to satisfy a certain policy or simply change the rules, one can feel less trusting of the data or the interpretation.  Let's face it, economic data is left to interpretation by everyone, and with that opinions are vast.  One group may see the data shaping a certain way, another group may see it trending differently.  But we only have one Federal Reserve and the interpret the data in their own way and shape monetary policy accordingly.  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 it's about the anticipation of the data and the hope good numbers start trending.  But the data are the data, the facts are the facts.  When the CPI report comes out with a hot inflation number but then the next month it is cooler, should we interpret that differential as a pivot?  One number does not make a trend, but when markets are struggling and investors are looking to grab onto any green shoot they can find, the emotions start running wild.

The Fed has been very clear the data is going to be an important part of the decision making process, but only a part of it.  What data is the Fed and other economists looking at to make a judgment about the economy?  There are several tools and levers, but we start with gross domestic product, or GDP and the supporting data for that category.  What contributes to the growth in GDP?  We could start with retail sales, industrial production, manufacturing data (ISM, PMI), regional manufacturing indices and the fed's beige book.  

In addition, the jobs data is vital information to determine the health of the economy and inflationary trends.  the non-farm payroll, or the NFP is the big estimate of job growth, while jobless claims, layoff data, job openings and ADP provide data points around the edges.  The fed will also look at productivity, unit labor costs and wage growth statistics.  

Housing statistics are extremely important data points for the Fed and economists.  Housing starts, permits, units sold, prices and inventory levels give us a good picture of the most valuable part of a family's asset base.  Lastly, sentiment data is important as well, like consumer confidence, leading indicators, polling data and surveys.  While not hard data, these do tend to trend in a direction the Fed and others can make their decisions.

Bottom line, pay attention to the data but have less of a bias when you interpret the data.  You'll find it speaks to you and gives you a good read on the economy and future Fed policy.