The U.S. Capitol in Washington, D.C., on September 26, 2023.
The imminent U.S. government shutdown, which threatens to delay the publication of key economic data, will test policymakers' and investors' trust in a range of less-regarded third-party indicators.
Without critical figures like the Labor Department's monthly employment report and a key inflation gauge from the Commerce Department, data from private-sector sources will take the spotlight. New trackers of job openings and economic activity have emerged in recent years, and well-established ones have reinvented themselves to better answer ongoing questions in the economy.
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Some of these indicators—including gauges of business activity from the Institute for Supply Management, private payrolls from ADP Research Institute, and existing-home sales from the National Association of Realtors—have informed Federal Reserve officials in their quest to tame the worst inflation in a generation. Others do so indirectly by feeding into government reports.
Yet when any policy missteps could be enough to tip the world's largest economy into recession, the Fed's emphasis on decisions as "data dependent" becomes more precarious.
Although officials had to rely on non-government measures in past shutdowns as well as early in the pandemic, economists generally regard those figures as less reliable than the Bureau of Labor Statistics (BLS), Census Bureau, and Bureau of Economic Analysis (BEA) releases, which are set to be halted.
"It's not like there are all these perfect substitutes laying around," said Michael Pugliese, senior economist at Wells Fargo & Co. "It's hard to replace both the quantity and the quality of that gold-standard data."
The U.S. federal government is moving toward a shutdown on October 1, as far-right House Republicans prepare to block an extension of current funding, and a closure could last weeks or more.
Combined with the resumption of student-loan payments, labor unrest, and rebounding energy prices, the data blind spots could make the Fed's interest-rate decision even trickier at its next meeting, on October 31 and November 1, as it debates whether to extend or conclude its tightening cycle.
"We're at a turning point for monetary policy and a possible turning point for the economy," said Ellen Zentner, chief U.S. economist at Morgan Stanley. "Anything that muddies the lens of the economic picture that we're getting or through which we look at the economy—be it private forecasters or the Fed—represents a complicating factor."
Fed Chair Jerome Powell said last week that, in the event of a shutdown, central bankers "would just have to deal with that." Minneapolis Fed President Neel Kashkari said this week that he's "confident" policymakers will still be able to make decisions, adding: "We might then have to do less with our monetary policy to bring inflation back down to 2 percent because the government shutdown or the auto strike may slow the economy for us."
The central bank isn't new to the alternative-indicators game. Since the mid-2010s, the Fed has used ADP's data to build its own estimate of job creation, said David Wilcox, Bloomberg's director of U.S. economic research, who previously led the Fed's Division of Research and Statistics. The Fed has also been constructing a measure of consumer spending drawn from Fiserv, which collects card-transaction data, he added.
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"A lack of data for the Fed is probably slightly less of a big deal than it was a decade ago because there are more alternative-source data available now. Though they can't replace the official data, these should help some."
— David Wilcox
Some third-party data sources already have a track record in affecting policy.
Powell cited "eye-catching" data on inflation expectations from the University of Michigan in June 2022, which, in combination with a hot consumer price index (CPI) print, tilted the Fed toward a jumbo-sized interest rate increase that month. And early in the pandemic, officials often looked to high-frequency sources like restaurant-booking site OpenTable to gauge consumer behavior when government reports were delayed or outdated.
"There has been an evolution of the way that economists and market participants generally look at economic data," said Thomas Simons, senior economist at Jefferies LLC. "We're not as totally reliant on the numbers that come from the government number mills."
The Department of Labor said in its updated contingency plan this week that a prolonged shutdown may impact its data-collecting process and therefore the quality of future estimates it produces.
What's more, the growing availability of third-party indicators comes at a time when concerns around the reliability of government reports are mounting. Job-opening data may be compromised by falling response rates and fake postings, while figures on unemployment insurance claims have been tainted by fraudulent applications.
Economists at jobs website Indeed Inc. have developed a tracker that's similar to the Labor Department's Job Openings and Labor Turnover Survey but is released in a more timely manner. The two aren't supposed to mirror each other, though they tend to tell the same story, said Indeed chief economist Svenja Gudell.
"The trends are aligned very nicely," she said. And at the end of the day, "the trend is what you are interested in."
—With assistance from Catarina Saraiva.
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