There was an interesting article last week in the FT from the Chief Economist at Credit Suisse, James Sweeney, about looking beyond headline GDP data for measuring macroeconomic performance.
This relates to something I’ve thought about a lot in the past when it comes to making trading decisions. You have the economic data you know the market is looking at and reacting to in the short term and the release of that will lead to some sort of instant knee-jerk reaction. Then you have the economic data that actually shows how something is performing, which will dictate the future direction of the market.
So you have the data that causes a short-term reaction and the data that truly shows what’s going on and therefore dictates the long-term reaction.
The pandemic is undeniably changing the way things are being done, and the way we look at economic data and measures of the economy have also shifted.
James Sweeney says “Body temperatures, foot traffic, internet trends and stimulus cheque arrivals represent a small sample of the data that have been critical in assessing real-time economic activity. These measures have told a more precise story of the 2020 economy than national account measures such as gross domestic product or inflation.”
He points out that nominal GDP is a useful and clearly defined statistic, but that measure obviously means real GDP plus inflation and a lot of the issue there is with the measurement of inflation. This is because, if the measure of inflation is wrong, it means the measure of real GDP growth will be wrong too.
In addition to that, we have to think about the way the data is used. An overall headline figure like GDP or things like GDP-per-capita, don’t necessarily show an accurate change in living standards and shouldn’t be given the importance they are from that point of view.
As Mr. Sweeney says “The possibility of mismeasurement in national accounts is well known but the misuse of those data is more consequential. By “misuse” we mean the casual assertion that these statistics represent everyday concepts of living standards and the cost of living. This error is clearest when we examine long-term GDP estimates, and ask whether it is plausible that living standards were changing in the steady, linear way that long-term real per capita GDP charts suggest…
...Similarly, we sometimes encounter claims of jumping real wages and even “rising living standards” after the 14th-century plague. Historical accounts of life after 1348 in western Europe do not, however, paint such a rosy picture of life in that period. Last year’s GDP data will hardly inform future generations about economic life in 2020.”
He points out that there are efforts to rectify these problems by using alternative data such as disease-based price indexes, happiness measures, activity trackers sourced from satellites and things like the ‘billion prices’ project to track data from retailers around the world on a daily basis.
We can look at this from a trading or investing point of view and think what sort of errors in judgement are made by looking at data in the wrong way, or even looking at the wrong data altogether. But when that’s the case, the only person that’s harmed are us. We’ll be making decisions incorrectly and will suffer the consequences. Or any clients we have.
The bigger issue is how this relates to policy decisions. As Mr Sweeney says
“For example, should additional fiscal stimulus measures target overall GDP or should it target households or businesses that are suffering most for no fault of their own?”
“The broadening use of contemporary “narrow” data is offering rich perspectives of economic life. Alternative indicators have enabled excellent real-time analysis during the pandemic. This has helped to guide policy decisions and minimise the macroeconomic damage.”
So, will 2021 be the year for a data revolution? I’d say it’s unlikely from a policy point of view, but I definitely think there’s food for thought there for us as traders and investors. I know from when we looked closely at the pork industry when there was the virus there, the use of alternative data was essential for making any sort of decisions or judgements about the situation.