Labor Market Data Concerns Prompt Cautious Fed Approach
The July jobs report, which displeased former U.S. President Donald Trump, who called it "manipulated" and fired the Bureau of Labor Statistics (BLS) chief, is viewed by Federal Reserve officials as significant evidence of a slowing economy. This slowdown served as a justification for the interest rate cuts that Trump desired.
"The latest jobs report confirms the presence of fragility and declining vitality in the labor market," said Michelle Bowman, a Trump-appointed Federal Reserve Governor, in a speech. She elaborated on how the latest jobs data and downward revisions to data for previous months confirm her concerns about a weakening economy. "I believe that delaying action could lead to a deterioration in labor market conditions and further slowing of economic growth."
Skepticism vs. Trump's Desire for Rate Cuts
While signs of a weaker labor market might fulfill Trump's desire for interest rate cuts by the Fed (which he believes would reduce interest costs on the U.S.'s growing debt), it contradicts his claims that his "program of tax cuts, immigration, and trade is driving economic growth."
Recent remarks from policymakers who previously focused on rising inflation suggest that news of slowing job growth in May, June, and July has begun to change their judgment of the risks facing the economy.
Cross-Verification of Data Eases Concerns
Although Bowman and another Trump-appointed governor, Christopher Waller, are currently the only ones advocating for an immediate rate cut (both voted against last month's decision to keep rates unchanged), investors currently believe that the probability of a rate cut at the Federal Open Market Committee meeting on September 16-17 exceeds 85%.
Of course, this depends on the data that will be released before then, including the July consumer inflation data and the August jobs data—both of which come from the Bureau of Labor Statistics (BLS), which Trump deems untrustworthy.
Despite recent shortcomings in data compilation at the BLS, it has rigorous audit mechanisms to ensure that data is not manipulated; and the Fed is sensitive to data with grey areas, and is always cautious when changing policies.
E.J. Antoni, chief economist at the conservative Heritage Foundation, was appointed by Trump to the position of BLS chief. Given that this appointment could affect the credibility of data that can influence interest rates, stock prices, and political fortunes, the economic and investment community's attention to it is no less than their attention to Jerome Powell's upcoming successor as Federal Reserve chairman.
Federal Reserve policymakers recently mentioned in their speeches that they have ways to supplement and cross-verify BLS data.
"Policymakers look at data from government statistical agencies, as well as a large number of non-governmental statistical agencies. We strive to validate the information conveyed by different data sets, and ensure that they point to a consistent conclusion," said St. Louis Federal Reserve President Alberto Musalem.
"I believe we can continue to do an excellent job… We closely track economic developments through direct interaction with businesses and families across the country. Therefore, in addition to data, we also have a very intuitive feel for the economy," he said.
Alternative Data Sources for the Fed
Even amidst personnel changes at the BLS, the Fed does not lack clues to economic data to refer to.
In recent years, private data sources have expanded significantly, and there are some alternative indicators that measure consumer traffic, prices, job vacancies, and recruitment almost in real time through online recruitment sites, mobile phone positioning, and online prices.
Institutions such as the Institute for Supply Management (ISM) provide important insights on inflation; while surveys by the University of Michigan, the National Federation of Independent Business, and the Conference Board reveal inflation expectations, hiring situations, and general economic prospects.
Administrative records also provide important support, because they are statistics of actual events. States submit weekly reports on unemployment benefit claims, which the Department of Labor compiles into a report; while the BLS's Quarterly Census of Employment and Wages (submitted by companies) provides lagging estimates of monthly job growth.
The Fed also has its own data collection channels, including surveys of corporate executives (such as CFOs), and the numerous informal interviews on which the Beige Book, which is prepared for each interest rate meeting, is based—this report provides a perspective on economic conditions through anecdotes. A compilation of quarterly data provides a lagging view of the health of household balance sheets.
Minneapolis Federal Reserve President Neel Kashkari said in a CNBC interview that he believes that any attempts to manipulate the results of data from agencies such as the BLS will not succeed.
"We will watch who the president appoints to replace the person who was fired. But in the end, we will look at their data, and we will also look at all the data we can get, and we will also refer to all the conversations with companies. All of this will be included in our assessment of the economy," Kashkari said.
"You cannot fake economic reality... Imagine, even if the data is manipulated for the political interests of some people, people will feel the actual situation. Either companies are hiring, or they are not, and Americans will see the real economy. Trying to convince them that inflation does not exist is not an effective strategy; convincing them that job data is better than it actually is, I don't think that will work either."
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