In recent months, markets have been laser-focused on every scrap of economic data for evidence on whether inflation is coming down or a recession is approaching. Unfortunately, that data suffers from a growing problem: reduced responses from the people whose activity it seeks to measure.
“There’s more data than there has ever been in the history of the world,” said Torsten Slok, the chief economist of Apollo Global Management Inc. “But the Fed has a dual mandate that’s called inflation and employment. That’s why financial markets spend the vast majority of their time on those two items.”
Both are drawn largely from surveys of businesses and households, and “the response rates are going down on both,” he said.
This is a problem for two reasons. First, surveying only works if the people it samples are representative of the overall population. When response rates drop, the people who don’t answer might have something in common, biasing the results. Falling response rates are a well-known problem in private polling; it’s one reason some experts think political polls have missed the results of recent presidential elections so badly.
Second, even absent systemic bias, falling response rates mean the data isn’t capturing the true state of the economy. [Continue reading…]