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Next week, the Federal Open Market Committee will assemble to determine the future direction of interest rates. Analysts expect the Fed to lower the rate by another quarter-point, after a quarter-point drop in September. FOMC meetings also yield statements about the state of the economy and predictions for future growth and unemployment rates.
This time, there’s one problem: The Federal Reserve lacks certain key economic data that can help in decision-making, because of the government shutdown. And while this is happening, an apparent snafu involving a collector of private jobs data has blinded the central bank even more.
The payroll company ADP appears to have cut off the delivery of timely data encompassing 20 percent of all payrolls, which Fed governor Christopher Waller disclosed in an August speech. ADP and the Fed would not comment on the matter, but sources tell the Prospect that ADP was unhappy with the disclosure. A letter from Fed chair Jerome Powell that has been described to the Prospect urgently asks ADP to reverse its decision and resume giving them the data, intimating that the central bank needs the information to set policy. A Freedom of Information Act request for the letter has yet to be processed.
The Fed considers information from a variety of sources in setting monetary policy, everything from anecdotal reports to original data produced by its regional Reserve Banks. But the loss of public, and apparently some private, data is an acknowledged blow. Last Tuesday, Powell took questions about the lack of economic data after a speech about the Fed’s balance sheet. He cited state-level unemployment claims as well as data from ADP as providing a “plausible” picture. However, he added, “the private data we look at is better used as a supplement for the underlying governmental data which is the gold standard. It won’t be as effective as the main course as it would have been as a supplement.” Powell conceded that if the shutdown continues, making inferences about the nature of the economy would “become more challenging.”
This means that the Fed is operating with less information to conduct its policy decisions, at a time when, prior to the shutdown, the leading economic indicators were pointing in different directions, with inflation still elevated and employment sagging, yet also with gross domestic product still growing at a robust pace.
“They have to try and figure out if we should be aggressively pushing toward faster job growth again,” said Mike Madowitz, chief economist at the Roosevelt Institute. “The brake on that is inflation has been accelerating.” Missing data turns this already difficult set of options into more of a guess.
DURING THE SHUTDOWN, MOST GOVERNMENT AGENCIES have stopped collecting the facts that give policymakers and businesses a real-time window into how the economy is faring. That includes the Bureau of Labor Statistics’ monthly jobs report, which issues the unemployment rate and the number of jobs gained or lost. Because inflation numbers are critical for determining cost-of-living adjustments for Social Security recipients and bonds that are indexed to the Consumer Price Index, furloughed workers are being brought back to issue the next report on Friday. But jobs reports are delayed indefinitely, and data has not been collected for the October series.
Weekly unemployment data for first-time jobless claims is also not being released, though states compile and publish this data on a rolling basis, without seasonal adjustments. We can already see an uptick in federal workers filing for unemployment benefits at the highest level since the last major government shutdown in early 2019. “Ironically, the shutdown and its negative impacts on HR processing times means it will likely be weeks before individuals see any benefits,” said unemployment insurance expert Andrew Stettner of the Century Foundation in a statement.
There’s a longer-term BLS series for jobs information, the Quarterly Census of Employment and Wages (QCEW), which is not based on sample data like the jobs report but actual payrolls from employers covering 95 percent of all U.S. jobs. But the public only gets QCEW data with a six-month time lag, and the next release isn’t scheduled until December 3. Plus, the most recent QCEW release was notable for unusually high levels of missing information. According to Nela Richardson, chief economist at ADP, “the most recent release of the QCEW contained a higher-than-normal number of missing or redacted values for establishment size by NAICS sector and geography subgroups.”
It’s unclear what accounted for these redactions, and whether agencies like the Federal Reserve received unredacted data. The Bureau of Labor Statistics has had collection problems all year because of staffing shortages, leading to less reliable data.
The Chicago Federal Reserve has just stood up a “Labor Market Indicators” report, updated twice a month, that forecasts the unemployment rate. But that relies on Current Population Survey data from the U.S. Census Bureau that is not being collected now.
Some public releases go on during a shutdown and can be used as a proxy for the broader economy. For example, the Energy Information Administration produces weekly reports on energy demand and prices, which approximates economic activity somewhat. Other private data, like the Baltic Dry Index for shipping or auto sales reported by manufacturers, can give a raw sense of consumer demand. But that doesn’t pack the same punch as knowing monthly hiring.
There have been some private-sector attempts to replicate the jobs data. A Carlyle jobs report for September found a relatively small gain of 17,000 jobs; Revelio, which bases its numbers on online job postings and profiles, found a gain of 60,000; and ADP actually showed a loss of 32,000 jobs for the month. None of these reports account for public-sector jobs, which with the shutdown are clearly constrained.
But the monthly BLS jobs data is based on surveys of more than 600,000 worksites in real time. “This level of precision, you don’t do that stuff on the first pass,” Madowitz said of the private-sector substitutes. “You get that because you established the culture of collecting that stuff and continually improve it for decades. When you hear people talk about private stuff, it’s usually in the classic disruption business model sense of ‘This will be cheaper and less good.’”
The latest blow to the Fed’s knowledge base is an under-the-radar kerfuffle involving ADP. Waller, a Trump nominee to the Federal Reserve Board back in 2020 who has been pushing for reducing interest rates, gave a speech on August 28 called “Let’s Get On With It.” One page 4, Waller noted that “I also look at timely data that Federal Reserve staff maintains in collaboration with the employment services firm ADP to construct a measure of weekly payroll employment, which covers about 20 percent of the nation’s private workforce. This measure is comparable to the one ADP publishes.”
It is not clear what is different about this collaboration and ADP’s public report that it releases every month. Former Fed governors and employees were not aware of the collaboration, but sources tell the Prospect that it only began in the last few years.
But the revelation that the Fed is possibly getting something extra gained notice among economic commentators. On a CNBC appearance on October 1 to discuss ADP’s monthly numbers, chief economist Richardson was asked about this. “We know the Fed, you may not have wanted this to happen, we know the Fed gets this data,” said Steve Liesman, adding that ADP “didn’t necessarily want this to be public.”
“What do they know that we don’t know?” asked Becky Quick. Richardson didn’t really answer the question. “You know, if I could sit in that room, I could have a complete answer!” Richardson said, chuckling. She said that the Fed has spoken about using ADP data in minutes and documents, “so it wasn’t a secret.”
However, the letter from Powell, which has not been publicly reported, suggests that ADP was unhappy about the disclosure of the collaboration, perhaps because its other clients didn’t know about it, and put it on hold. Powell, according to those who have seen the letter, asked for ADP to resume the collaboration. There was a “whiff of desperation” in the letter, one source explained, with Powell indicating that the data was sorely needed.
If Powell and the FOMC make a change to the interest rates (as is widely expected) without a full picture of the economy and without access to some data they apparently rely on, the Fed chair will have to answer for that if the decision leads to material changes, particularly in the inflation picture. Typically, interest rate cuts would heat up the economy and could spark greater demand and higher prices. A small cut of a quarter-point is unlikely to do much, but the trajectory of running the economy hot would continue, without the same information to see the consequences of that choice.
“If this is still ongoing by the time Powell is talking to reporters again,” Madowitz said, “they are workshopping the answer to ‘What do you do without data?’”
