OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 1

The Use and Abuse of Real-Time andAnecdotal Information in Monetary Policymaking

Evan F. KoenigSenior Economist and Vice President

Federal Reserve Bank of DallasDallas, Texas

USA

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 2

Main points • Data revisions complicate policy• Usually, revisions are not given

proper treatment• Anecdotal/qualitative information

potentially valuable

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 3

Example of the revisions problem:U.S. monetary policy in the 1990s

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 4

Professional forecasters over-predicted inflationduring most of the 1990s

0

1

2

3

4

5

6

7

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Percent/Yr.

Blue Chip Forecasts

CPI Inflation

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 5

A candidate explanation: profitability • profitability = (labor productivity)/(real wage)

= price/(labor cost per unit output)• high profitability ⇒

▪ expand output and employment▪ raise wages or cut prices

• 1970s: productivity deceleration + sluggish real wage ⇒ low profitability

• 1990s: productivity acceleration + sluggish real wage ⇒ high profitability

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 6

Profitability movements explain muchof the NAIRU’s variation

3

4

5

6

7

8

9

10

11

'68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '980.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

0.76Percent Ratio

Profitability (inverted)

Inferred NAIRU

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 7

Profitability apparently a powerful long-leadingunemployment indicator

2

3

4

5

6

7

8

9

10

11

'62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '060.610.620.630.640.650.660.670.680.690.700.710.72

Percent Ratio

Unemployment RateProfitability

(inverted, shifted 3 yrs.)

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 8

Profitability estimates are subject to large revisions

1.44

1.46

1.48

1.50

1.52

1.54

1.56

1.58

'82 '85 '88 '91 '94 '97 '00 '03

Initial EstimateToday's Estimate

Ratio

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 9

Inflation pressures: revised vs. real time

3

4

5

6

7

8

9

10

11

'81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '990.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

0.76Percent Ratio

Unemployment Rate(left axis)

Revised Profitability(inverted, right axis)

Real-Time Profitability(inverted, right axis)

Recession Recession

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 10

Apples and oranges • Data relevant for policy are 1st

release or lightly revised (oranges)• Forecasting models usually

estimated using heavily revised data (apples)

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 11

Correct procedure: estimate using “real-time-vintage” data

• “Real-time vintage” = at each point in sample, the 1st release and lightly revised data then available

• Requires short data series of many vintages

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 12

Alternatives to conventional statistics: anecdotal & qualitative data

“Who are you going to believe? Me or your lying eyes?”

–Groucho Marx

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 13

The Federal Reserve collects anecdotalinformation:

• Through Directors of 12 regional Reserve Banks and their 25 Branches

• Through calls to business contacts prior to each FOMC meeting▪Each Reserve Bank prepares a call summary▪Summaries are assembled and released as

the “Beige Book”

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 14

How useful is the Beige Book? • Receives substantial press attention• Has predictive power for output and

employment

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 15

The collapse of high-tech industrial production

240

250

260

270

280

290

300

310

320

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov900950100010501100115012001250130013501400

Current vintage (left axis)As of 1/17/01 (right axis)

Index, 1997 = 100 Index, 1992 = 100

2000 2001

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 16

The collapse of high-tech industrial production

240

250

260

270

280

290

300

310

320

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov900950100010501100115012001250130013501400

Current vintage (left axis)As of 1/17/01 (right axis)

Index, 1997 = 100 Index, 1992 = 100

2000 2001

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 17

“Sales growth weakened sharply for producers of high-tech equipment.”

“Businesses have begun to curtail technology-related investment.”

“Consumer demand for PCs has been weakening since the Fall of 2000.”

–FRB-Dallas Beige Book report, January 2001

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 18

ISM Report on Business • Survey of 400 manufacturing firms,

nationwide• Orders, output, jobs, etc.: expanding,

contracting, or unchanged?• Numerical index = % expanding +

0.5 × (% unchanged)• PMI = weighted average of

component numerical scores

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 19

Goldman-Sachs study shows PMI a big market mover

4.54.1

3.8

2.01.7

1.5

1.0

PMI GDP Payrolls ConsumerConfidence

Retail Sales IndustrialProduction

InitialClaims

Basis-Point Impact on Treasury Notes

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 20

Limitations of PMI/Beige Book • Sampling not scientific (small,

unrepresentative)• Responses not properly weighted• Beige Book difficult to interpret

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 21

Advantages of PMI/Beige Book • Timely• Little if any revision• Respondents filter out short-term

fluctuations

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 22

The PMI captures trends in factory output growth

-12

-9-6

-3

03

6

9

1215

18

'84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '042732374247525762677277

Index Percent/Yr.Factory Output(annualized 3-mo. Growth)

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 23

The PMI captures trends in factory output growth

-12

-9-6

-3

03

6

9

1215

18

'84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '042732374247525762677277

Index Percent/Yr.Factory Output(annualized 3-mo. Growth)

PMI (3-mo. Avg.)

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 24

Summary and Conclusions • Don’t trust charts/forecasts that mix

apples (heavily revised data) and oranges (lightly revised data)

• Archive statistical releases!• Anecdotal/qualitative information

potentially quite helpful

OECD World Forum “Statistics, Knowledge and Policy,” Palermo, 10-13 November 2004 25