Thought for the day

Key Interest Rate Decisions Rely Partly on Garbage Data


 
28 April 2024
 
Central banks the world over rely on deeply flawed data to make crucial decisions on interest rates. Few politicians, economists or bankers realise just how unreliable economic data has become in recent years.

In the US the percentage of companies responding to two vital job surveys: the Bureau of Labour Statistics Non-Farm Payrolls (NFS) and Job Openings (JOLTS) has fallen dramatically since Covid. The release of the US Jobs data on the first Friday of each month still generates feverish anticipation in the financial markets, but how many realise that the response rate to the JOLTS survey has fallen from 65%+ to a little over 30% in just a few years. Anything close to a 30% response rate is unlikely to produce data good enough as the basis for vital decisions on monetary policy.

The UK holds lead position for self-harm in respect of economic data quality, having decided to relocate the Office of National Statistics from central London to an obscure industrial park a 3 hour drive away. Some 90% of the previously London based ONS staff left their jobs, causing serious problems that persist to this day.

The UK equivalent to the US Jobs surveys is the ONS's Labour Force Survey. It was designed to operate with a 55% response rate, but the length of the survey has been unwisely expanded, inevitably reducing response rates far below the desired level. In addition, as in many other countries, Covid led switches from in person to phone surveys brought survey response rates down further to (in the UK case) wholly unacceptable levels around 15% in 2023.

UK Labour Force Survey Response Rate (%)
Actual response rate – all waves
Key Interest Rate Decisions Rely Partly on Garbage Data




Source: Office of National Statistics, Labour Force Survey performance and quality monitoring report.

This brings to mind the old expression "Garbage in...garbage out", referring to the quality of any output based on the input of untrustworthy data. The Bank of England has an interesting problem in making interest rate decisions on the basis of such obviously garbage quality survey data!

Many other economic data surveys (in many other countries) suffer from the problems illustrated by the US and UK. Central banks, finance ministries, and others dependent on the data produced by national statistics offices, need to pay attention to the often alarmingly poor quality of such data.
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