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

Joe Weisenthal (0:00)

Hello, Odd Lots listeners. You will be enjoying an episode of one of our fellow podcasts on the Bloomberg Network, Big Take DC.

Tracy Alloway (0:08)

Yep, hosted by Saleha Mohsin. This episode features one of our favorite guests, economist Claudia Sahm. You might remember that we spoke to her back in November about the outlook for the US economy, and Saleha digs even deeper into what's driving things like sentiment consumer surveys versus the hard data right now. Now, take a listen.

Saleha Mohsin (0:31)

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. So 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.

Joe Weisenthal (1:30)

The labor market remains very tight.

Saleha Mohsin (1:34)

All this talk about the tight labor market made Claudia Sahm'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.

Claudia Sahm (1:52)

They 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.

Saleha Mohsin (2:05)

That data they've been focused on? She's had some serious questions about it.

This morning, the government released new GDP data that shows the US successfully avoided a recession. Even though almost every economist was predicting one. But the data that the Federal Reserve examine as it made policy decisions is complicated. On today's show, have policymakers trusted data that might have been faulty? I talked to Claudia Sahm about her findings. 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. I'm your host, Saleha Mohsin.

Claudia Sahm 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.

Claudia Sahm (3:15)

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.

Saleha Mohsin (3:30)

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.

Claudia Sahm (3:46)

Data doesn't come down from heaven.

Saleha Mohsin (3:49)

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.

Claudia Sahm (4:12)

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.

Saleha Mohsin (4:22)

Because of the pandemic, the way employers list jobs is just different than it was before.

Claudia Sahm (4:27)

Especially from work from home, you can put up multiple ones for different geographies because it doesn't matter.

Saleha Mohsin (4:33)

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.