The Fed relies on dubious data to chart the course of the economy.

That means that as Fed officials prepare for another big interest rate hike that is likely to rattle the economy and markets, they are doing so without a clear view of their target. This uncertainty raises the risk that they will either do too much – triggering a deep recession – or too little, prolonging red-hot inflation and making it harder to control.

David Wilcox, who led the central bank’s research division from 2011 to 2018, said the Fed was “putting together a puzzle where the pieces were taken off and they don’t quite fit together.” “Where is the economy today, and where is it headed? All our measures, no matter how well aggregated, provide only an incomplete and somewhat outdated view of these important questions.”

One example: When the Fed raised rates in June, it opted for the largest hike in nearly 30 years, a decision that Powell said was based in part on signs that consumers were expecting future interest rates. have raised their expectations for inflation. Shortly after the Fed’s move, the data was revised to suggest that expectations had not actually changed much.

Behind this confusion is the extraordinary upheaval in the country in recent years. The economy has been hit hard by the pandemic, rising prices not seen in decades, unexpected supply chain disruptions and Russia’s war in Ukraine. This simultaneously makes the most recent data more important and less reliable.

The usual adjustments based on weather factors are now more difficult, as forecasters try to analyze what data suggests the economy is slowing, whether it’s just a blip or whether there are more structural changes in society. Indicates changes.

“The economy has changed,” said Nella Richardson, chief economist at payroll processing firm ADP. “It’s tilted on its axis, and we’re not sure at what angle it’s tilted.”

Even in the best of times, real-time measures of economic health are imperfect. Official data on inflation and employment are reported at intervals and then updated over time as better information becomes available. The largest gauge of economic activity—gross domestic product—is compiled using a whole host of data sets that are each revised individually.

After a strong labor report earlier this month, Atlanta Fed President Rafael Bostic said on CNBC that the economy still looks strong — despite the real-time data published by his own regional Fed branch. GDP growth was negative in the second quarter, according to the forecast. If that forecast is backed up by official government estimates on July 28, after a similar decline in the first quarter, it would meet a technical definition for a recession.

Still, GDP numbers are often heavily revised years later as more accurate data is finalized, such as tax return information from the Internal Revenue Service and the annual manufacturing survey. And many of the factors that have contributed to shrinking GDP in recent months have been technical — companies have been stockpiling supplies for their back rooms and so aren’t adding much to that inventory, or dollars. Wind has strengthened, making imports cheaper and fueling trade. loss.

Fed Governor Christopher Waller said in a recent speech that he is not putting too much stock in the GDP numbers just yet.

“While first-quarter real GDP is now estimated to have declined by 1.6 percent, another estimate has real gross household income rising by 1.8 percent,” he said. “GDP and [gross domestic income] Essentially measuring the same activity in different ways, and in the past when the two numbers showed such a wide gap initially, they tend to converge when the data is finalized.

Meanwhile, while some key indicators are more easily quantifiable, such as industrial production, others, such as the value of technological innovation, are less so. Real-time employment data collected in the Labor Department’s survey has recently been troubled by a low response rate from companies, while consumer expectations about inflation have deteriorated. Because the sphere of opinion is wider than ever.

“All data is fragile in its own way,” said Skanda Amarnath, executive director of the worker advocacy group Employ America.

For now, Fed policymakers believe the economy is still fundamentally strong, suggesting they lean more heavily on data about the job market, a clearer and more timely indicator of the economy’s overall health. There is a hint. But here, too, there are signs that layoffs have begun, and wage growth has begun to slow. On Thursday, the Labor Department reported that initial jobless claims totaled 251,000 last week, the highest level since mid-November.

“You have to figure out, what should I infer from this data?” said Claudia Sahm, another former Fed economist who is now a senior fellow at the Jain Family Institute. “As you get more and more pieces of data, then you look at them and you say, does this fit my story? And if you find enough pieces of information that don’t fit, you Rewrite the story.

Wilcox, an economist at the Peterson Institute for International Economics and Bloomberg Economics, said that one way the Fed tries to overcome data gaps is by gathering information from many different sources.

For example, information from Card Processor First data can be used to identify regional factors in national retail sales data, providing insight into consumer spending power—which is an important variable in inflation forecasting. The central bank also uses data from ADP, which tracks actual payroll transactions for 26 million companies, to complement the Labor Department’s employment survey to get a bigger picture of the job market.

ADP’s Richardson said the firm is also improving its national employment reports to make them more frequent as well as more independent of government data. It will no longer attempt to forecast the monthly government jobs report.

Consumer sentiment surveys conducted by the University of Michigan and the Conference Board are remarkably varied. These signals are important to interpret because a drop in sentiment is almost always a reliable indicator of when the economy may be entering a recession.

“We’re in a situation where labor markets are really strong, and we’re also in a situation where inflation is really bad,” said Juan Xu, director of the University of Michigan survey, which recently hit record lows. has been killed.

“Our index of consumer sentiment is where consumers are going to tell us about their complaints about inflation,” he said, adding that the Conference Board’s survey of Americans’ labor market Reflects more clearly the constant optimism. The hope, he added, is likely to be that consumer spending remains strong despite widespread gloom.

“We’re coming out of a situation where over a million people died, and there were economic lockdowns, and we’re in a period of incredible political polarization that affects people’s feelings about the country,” he added. does.” “We have no historical precedent for this.”