Are Recent Economic Data Wrong?

Why Louis Navellier is calling into question recent economic data … how the recent run-up in rates could be faulty … why this Friday’s jobs report is so important

The market is watching the Fed…

The Fed is watching the data…

The data are reflecting inflation and the resilience of the U.S. economy…

Or are they?

What if recent economic reports don’t give us an honest assessment of today’s situation? Getting that data wrong can make a big difference in your portfolio.

To begin unpacking this, let’s turn to legendary investor, Louis Navellier and his Weekly Market Commentary:

This week we will learn if the Federal government lied to us. 

I am not referring to Federal Reserve Chairman Jerome Powell’s testimony before the Senate on Tuesday or House on Wednesday. 

No instead, I am referring to Friday’s February payroll report. 

Specifically, I want to see if the January payroll report is revised substantially lower after being artificially boosted by massive seasonal adjustments. 

To make sure we’re all on the same page, about one month ago, the January nonfarm payroll employment number came in at a jaw-dropping 517,000

This blew away the estimate of 187,000.

This report panicked stock market bulls because it suggested the Fed’s rate hikes haven’t put a dent in the red-hot U.S. jobs market, which would mean upward pressure on inflation and probably continued interest rate hikes.

But what if the payroll data number was artificially high?

To explain how and why that could be, Louis points toward an article from The Wall Street Journal last week that discussed the mystery of “seasonal adjustments.”

In short, the government adjusts the math of its jobs-related calculations to try to smooth out seasonal bumps. But not everyone thinks that the way the government does this, or the data it includes, is providing an honest assessment of the economy.

From the WSJ:

Did the U.S. add half a million jobs in January or did it lose 2.5 million?

The government said both happened—but investors and policy makers cared about the seasonally adjusted increase of 517,000…

Throughout the year, consumers and firms alter their behavior, buying coats in the winter and hot dogs in the summer, and stocking folders for back-to-school season. That changes prices and when hiring and layoffs happen.

Government statistical agencies use complex models developed over decades to account for these patterns to make month-to-month comparisons possible.

That arcane process received more attention recently as some economists questioned if strong seasonally adjusted hiring, price and spending data to start the year accurately reflect what’s going on in the economy.

Back to Louis:

The WSJ pointed out that since “companies let go of holiday workers” that January has substantial seasonal adjustments. 

This WSJ article is effectively setting the stage for a potentially massive payroll revision on Friday.

If the adjusted payroll number is revised substantially lower, it will ease investor concerns about labor market strength, which would remove pressure on the Fed to continue a hawkish approach to rate hikes.

But the payroll report isn’t the only thing prompting skepticism from Louis

There’s also the January retail sales report.

As a refresher, here was CNBC’s headline about January’s retail sales report almost a month ago:

“Retail sales jump 3% in January, smashing expectations despite inflation increase”

But again, what if the data weren’t exactly “smashing”?

Back to Louis:

The other big economic report that may have also been exaggerated by January seasonal adjustments is the retail sales report next week on March 15th. 

And here’s Axios with more details on why the numbers could be off:

[The January retail sales report showing 3% growth] actually showed retailers had $121 billion less in January sales than they did in December — a 16% drop.

The difference is a result of the seasonal adjustment process that is applied to most major data — and right now, it may be sending misleading signals about how the economy is doing at the start of 2023.

To understand why this matters to your portfolio, let’s follow the breadcrumbs, which point us toward interest rates

Here’s Louis:

The fact that these two blowout economic reports may have been grossly distorted by January seasonal adjustments implies that interest rates might have surged for bogus economic reasons.

To see what this looks like, below, we examine the S&P’s performance (in black) compared with the 2-year Treasury yield (in green) over the last three months.

Notice how the 2-year yield fell in January. But at the end of the first week in February, it exploded higher following the jobs report release. And in the subsequent days, the rate continued to climb while the S&P proceeded to drop.

Here’s how this looks…

Source: StockCharts.com

As to the direct impact on your portfolio, we’ve covered this many times here in the Digest.

In short, higher interest rates raise the “discount rate” that’s used when calculating the market value of a stock. All else equal, the higher the discount rate, the lower the present value of a stock.

Put it all together and it makes this Friday’s labor report even more important

So, what’s expected from the report?

Here’s Bloomberg:

US job growth probably moderated last month after a blistering January pace, while the unemployment rate likely held at a 53-year low, illustrating a labor market that’s proved mostly impervious to the Federal Reserve’s massive interest-rate hikes.

According to Bloomberg’s survey of economists, the median forecast for the February payroll number is 215,000.

For context, remember, the January forecast was 187,000 but the number came in at 517,000.

Friday’s payroll data is even more important because it will be the last jobs report the Fed sees before its next FOMC meeting on March 21-22. Fed members will be deciding whether to hike rates by 25 or 50 basis points.

In recent weeks, Wall Street bulls have been all-but-certain the hike would be only 25 basis points. But now, in the wake of Federal Reserve Chairman Jerome Powell’s hawkish commentary this week, the odds that the Fed hikes 50 basis points have exploded to 79.4%.

For perspective, one month ago, these odds clocked in at just 9.2%.

The good thing for the bulls is that there’s now plenty of room for dovish surprises

For example, if the Fed only hikes 25 basis points, Wall Street will be pleasantly surprised. The market will likely leap higher.

Or, if Friday brings a softer headline number coupled with a meaningful downward revision of January’s number, it would be doubly-bullish…

First, it would imply short-term rates need to ease since their February surge would be shown to have been based on “bogus economic reasons,” as Louis put it.

Second, it would suggest that the Fed’s rate hikes to date are, in fact, having the desired effect. And that would remove the Fed’s feet from the fire as to the size of the March rate hike.

Regardless of what happens Friday, don’t get too comfortable. Next week we get the latest CPI and PPI reports on Tuesday and Wednesday.

Lots on the line. We’ll keep you updated.

Have a good evening,

Jeff Remsburg

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