So Fed officials did something they couldn't have done during previous shutdowns. They turned to a backup: Consumer spending figures from
"It was a big deal for the Fed in terms of having information about the economy when the retail sales data did not come out," said
The experience seems to have whetted the Fed's appetite for private sources of data that can help assess the economy's health. An institution that often calls its interest-rate stance “data-dependent,” the Fed is increasingly recognizing that some privately produced data is nearly as accurate as — and often timelier than — the government reports that it has long depended upon.
“We have been working with big data ... with the purpose of better understanding the current position of the economy,” Chairman
Thanks to an array of technological breakthroughs, the potential opportunities have expanded. Millions of financial transactions, digitized and compiled by private firms, could help the Fed and other government agencies track changes in company sales, prices, and wages. Computer processing power and data storage have become cheaper. Advanced software can make it easy to manipulate huge troves of raw data.
The biggest question is the potential payoff: Could the Fed's use of privately produced economic data help it detect — and fight — recessions more quickly? If so, government officials could, in theory, minimize job losses and the social and psychological upheavals that economic crises cause.
"These data are becoming of increasing practical importance for figuring out the state of the economy for policy making,"
That's because most government reports rely on surveys, which are costly and have been marred by declining response rates from businesses and households. Fewer homes have landline phones or respond to calls. And the surveys require detailed responses that households and companies are less inclined to provide.
By contrast, privately produced “big data” is automatically generated as people go about their daily lives. It is typically available faster than government reports. And it can show pinpoint information about neighbourhoods and regions.
Fed economists have discovered that data from the payroll processor ADP might have more quickly illustrated the severity of the 2008-09 Great Recession than the government's own data did. In early 2008, the government's initial reports on monthly employment had shown relatively few job losses. Months later, though, those figures were revised sharply higher to reveal much more severe job losses.
Tomaz Cajner, a Fed economist, and four colleagues used raw ADP data to construct a separate measure of employment. (ADP compiles payroll records for companies that employ about one-fifth of the workforce.) That measure found that in the first eight months of 2008, roughly 1 million jobs had been lost — more than the government's initial measure of 750,000 and nearer the final revised total of 1.4 million losses.
"Our new measure, had it been available in 2008, would have been much closer to the revised data, alerting us that the job situation might be considerably worse than the official data suggested," Powell said in a speech last fall.
The
Subsequent research showed that spending began to fall earlier in states where home prices had risen the most and then collapsed, such as
"We would have known it was coming," said Sahm, who is now a policy director at the
Economists have long urged government statistical agencies to take greater advantage of the increasing digitalization of the economy to more accurately track things like retail sales and price changes. Many large retailers can track daily sales figures. So why couldn't the government adopt a similarly nimble approach and issue its economic reports much more quickly?
"Consumers shop online, summon cars for hire with an app, watch 'TV' without television stations or TVs, and 'bank' without cash or checks," Shapiro and four colleagues wrote in a paper last spring. "Data could, in principle, be available with a very short lag."
Those trends have enabled many companies to stockpile data and mine it for economic insights.
Other government agencies have been investigating alternative data sources for years but are still in the early stages of using it.
And last winter the
At the same time, the use of privately-collected data poses challenges of its own. The government's surveys are designed to track specific economic trends. By contrast, private data doesn't always cover the same ground as a government survey. For example, the
And while the government strives to ensure that its reports cover a representative sample of the
There are more fundamental problems, too: Private companies have no obligation to share their data.
Still, Sahm says that data sets like
“It opens up a lot of opportunities to bring data to bear,” Sahm said.
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