The two economic data releases that US markets follow most closely—the monthly jobs report and quarterly GDP report—don’t actually tell us much about how the economy is doing, according to a new analysis by Goldman Sachs.
Goldman economists found that, indeed, the initial reports of US job creation and GDP growth move stock and bond markets more than any other data. The jobs report, in particular, is a time honored tradition in the financial markets, which often gyrate wildly on once the numbers are released at 8:30 a.m. ET on what is typically the first Friday of each month.
However, “neither indicator seems to contain statistically significant information for growth,” the Goldman analysts found.
How is that possible? Revisions.
Goldman ran its analysis focusing on the first-draft version of the jobs and GDP reports. The final versions have a good relationship with economic growth. But, of course, those final readings aren’t available when the data are first released. And that’s when the bulk of trading takes place.
But how can the hive-mind of the markets be so mistaken about the importance of an economic report? Aren’t markets supposed to be efficient information-aggregation machines? Maybe.
But they’re also assemblages of human activity and, therefore, full of mistakes. Goldman analysts seem to think that, when assessing economic data and how well it tracks the economy, market participants make the mistake of using final, fully revised numbers. Why? Because they’re easier to track down.
“Many investors and analysts use fully revised data—which are generally more easily available than first-release data—when trying to gauge the importance of a particular indicator for predicting future growth,” they wrote. “Our results suggest that these investors will put too much weight on indicators that tend to get heavily revised and are not very informative in real time.”
Goldman analysts point out a number of other indicators that do a better job of reflecting economic fundamentals on first blush. “The Philly Fed index, the Chicago PMI, and initial jobless claims contain a statistically significant and economically meaningful amount of information for growth,” they wrote.