US Economic Data Void Fuels Fed Rate Hike Debate

Article Summary

• Economic data void exacerbates divisions within the Federal Reserve.
• Difficulty in relying on available data due to government shutdown.
• Divergent views among policymakers regarding the need for rate cuts.
• Impact of data scarcity on investment decisions in the bond market.

The "shutdown" of federal agencies responsible for releasing economic data has left markets without the national jobs report for October for the second consecutive month. Economists fear these delays could "bury" some October job and inflation data entirely. Even if the government reopens soon, data that's eventually released will rely on after-the-fact surveys, undermining its reliability. This data black hole is intensifying long-standing divisions within the Federal Reserve over whether the labor market has weakened enough to justify cutting interest rates amid persistent inflation risks.

"This only sharpens the edges," pointed out Michael Cudzil, senior U.S. economist at RBC Capital Markets. "There will be a big question mark over the credibility of the official data."

Despite the data drought, Fed Chair Jerome Powell successfully forged a consensus within the Federal Open Market Committee to cut interest rates in late October. But he quickly tempered expectations, saying a repeat in December would be difficult. Several policymakers subsequently voiced their positions publicly nearly six weeks ahead of the meeting, adding fuel to Powell's warning.

At the October meeting, the Fed had the latest inflation data but lacked the jobs report. If the government reopens beforehand, they may face the opposite situation at the December 9-10 meeting. Theoretically, this would help in determining next steps, as Powell has framed the core December debate around the true health of the labor market. Notably, a sharp slowdown in summer hiring fueled concerns about monetary policy being too tight, which spurred the September and October rate cuts.

Powell stated clearly on October 29: "For some on the Committee, it's time to pause and assess whether there's a real risk of a downturn in the labor market."

However, the October jobs report, originally slated for release this Friday, will be fraught with problems – the biggest being how many of the unemployed are federal employees on temporary furlough, making the data difficult to parse. Some economists even believe the unemployment rate figure, which the Fed views as most critical, may not appear at all. The jobs report covers data for the week including the 12th of each month, and consists of two surveys by the Bureau of Labor Statistics (BLS): one is the nonfarm payroll data for businesses, and the other is a household survey used to calculate the unemployment rate.

Businesses can retain payroll data and report largely online, but conducting in-person and phone interviews with workers is highly challenging. They need to recall employment status for a specific week.

"The longer the delay, the less reliable the responses," warned Andrew Husby, senior U.S. economist at BNP Paribas, in his latest report. "We think it's highly likely that the BLS will abandon responses for the October data at some point, focusing directly on November data, which would mean the October unemployment rate will forever remain a mystery."

Even if an unemployment rate is eventually provided, how to separate potential trends from the government shutdown's impact will be a new problem. According to the Congressional Budget Office (CBO), if all approximately 650,000 furloughed federal employees were counted as "temporary unemployment," the unemployment rate would instantly jump by 0.4 percentage points.

Economists have pointed out that with the shutdown lasting six weeks, the likelihood of the BLS releasing the October Consumer Price Index (CPI) is diminishing, as the CPI relies heavily on field visits to businesses across the country. Authorities only ordered personnel to be recalled to release the September CPI to ensure the Social Security Administration could adjust cost-of-living, but no reports have been issued since the government shutdown on October 1.

Employment data is foggy, inflation data is missing, and this will only allow the "labor market crisis theorists" to continue calling for rate cuts, while the "inflation pessimists" insist on inaction, leading to a stalemate. However, futures contracts currently indicate that the market is still betting on the doves winning, with the odds of a rate cut in December remaining above 50%.

Those supporting rate cuts can use ADP's private employment data to bolster their argument – which showed that job growth in October remained weak, relying almost entirely on the education and healthcare sectors.

Conversely, officials opposing rate cuts can cite the weekly jobless claims data – which state governments continued to record during the shutdown, and showed no obvious surge.

However, due to the lack of alternative data from the private sector, government statistics on inflation are almost irreplaceable.

In the absence of official data from institutions such as Goldman Sachs and Morgan Stanley, investors in the $29 trillion U.S. Treasury market this week have also been caught in a dilemma: conflicting data released by institutions such as ADP Research, Challenger, Gray & Christmas Inc., and Revelio Labs has led to yield fluctuations in different directions.

Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investment, said these conflicting data points highlight the predicament faced by all participants.

"Jobless claims and the official unemployment rate remain the gold standard," Al-Hussainy emphasized.

Disclaimer: Investing involves risk, and caution should be exercised. This article does not constitute personal investment advice, nor does it take into account the investment objectives, financial circumstances, or specific needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article are appropriate for their particular circumstances. Investing on this basis is at your own risk.