Federal Reserve Faces Data Reliability Crisis Amid Budget Cuts

In recent weeks, the Chairman of the Federal Reserve has been under significant pressure from the President and other officials to lower interest rates. However, the Chairman, who has long relied on economic data to guide policy decisions, is now facing another challenge: the quality of the economic data collected by government agencies.

Economists have expressed concerns about the accuracy of economic indicators such as inflation and employment, which are crucial for policy-making. During a recent testimony to Congress, the Chairman expressed his own worries about the reliability of economic data.

“It is crucial for the Federal Reserve, Congress, and businesses to have a true understanding of the economic situation,” the Chairman stated. “I do not want to see the reports I read, nor do I want to believe that the data will become more unstable and unreliable. This would make the work of the private sector, Congress, and ourselves much more difficult.”

The question arises: is the quality of U.S. economic data indeed deteriorating, making it increasingly unreliable? The answer from industry experts is a resounding yes. One of the factors contributing to this decline is the reduction in government funding. The Bureau of Labor Statistics, for instance, has faced budget cuts this year. A proposal within the administration's budget aims to further reduce the bureau's budget by 56 million dollars.

The Bureau of Labor Statistics has experienced a shortage of personnel, leading to a decrease in data availability. Each month, the bureau's team collects price quotes for 200 categories of goods and services across 75 cities to calculate the Consumer Price Index (CPI). On June 16, the bureau announced the suspension of data collection in Buffalo, New York. Earlier in April, data collection for CPI was also suspended in Lincoln, Nebraska, and Provo, Utah.

The bureau had previously stated that these changes resulted in an increase in estimated values in the April CPI data, but asserted that the impact on overall inflation data was minimal. However, some industry experts disagree. The Chief Economist of Apollo, for example, pointed out that the proportion of estimated values has significantly increased in recent months, lowering data quality. Typically, about 10% of CPI values are estimated when data is unavailable. However, in May, the estimation rate was approximately three times the average, reaching 30%.

“In other words, nearly one-third of the prices currently entering the CPI index are based on guesswork derived from other CPI data collections,” the economist wrote in a recent report. Experts warn that this could lead to more frequent revisions of economic data, with the increased number of guesswork values potentially masking new developments in the economy, making inflation and employment data appear more optimistic than they actually are.

This issue is already evident in the labor market's employment data. Traditionally, the Bureau of Labor Statistics releases the initial monthly employment data on the day of the non-farm payroll report and then revises the data twice over the next two months. This year, every month's non-farm data has undergone continuous downward revisions: the second revision is lower than the first, and the first revision is lower than the initial value.

In other words, the non-farm numbers seen by investors this year have all overestimated the actual performance of the U.S. job market for that month. Global Chief Strategist of BCA Research and Chief Economist of Pantheon Macroeconomics both believe that although the May non-farm employment report released earlier this month showed an increase of 139,000 jobs, the final data could be revised down to around 100,000.

According to the Chief Economist, the current employment data is missing a significant portion of the economy: small businesses. These businesses, struggling to cope with the impact of tariffs, have submitted their reports late. “When data is missing, the Bureau of Labor Statistics fills in the gaps based on past trends. However, if the trend itself is weakening, once the previously estimated data is obtained, it is usually found that the actual situation is worse than initially estimated,” the Global Chief Strategist said in an interview. “The response rate to these surveys is very low, so the Federal Reserve has to make a lot of guesses. In an economic downturn, you tend to overestimate rather than underestimate the number of employed people,” the Global Chief Strategist added.