Friday, October 05, 2007

Can We Trust the Data?

Today's jobs report was certainly encouraging, but it raises an important question. Why does the government bother to release preliminary results if they are so unreliable?

The Bureau of Labor Statistics, which is responsible for tracking the data, said a month ago that August non-farm payrolls fell by 4,000. This spooked the markets. It convinced many economists that the economy was slowing much faster than they had anticipated. Most economists said the loss of jobs increased the probability of recession. It also put tremendous pressure on the Fed to cut interest rates. Because the jobs number was so weak, the Fed slashed both the fed funds rate and the discount rate by 50 basis points.

But today, the August figure was revised. It turns out that the economy did not lose 4,000 jobs after all. Instead, it actually created jobs. In fact, according to the most recent data, non-farm payrolls increased by 89,000 in August. Had the Fed known that, it may not have cut rates at all. In any case, it is now evident that the Fed went overboard.

Yet it must also be pointed out that even the 89,000 figure is not final. It will be revised one more time. We won't know until a month from now exactly how many jobs were created (or lost) in August.

In any case, today's data makes it much less likely that the Fed will lower rates again at its next meeting at the very end of this month. Given Chairman Bernanke's concerns about inflation, further rate cuts are highly unlikely.