EC Beware The Surge In Economic Noise

Identifying which way the macro wind is blowing isn’t getting easier. So far this month the government has published five key economic reports and each one has delivered sharply divergent results relative to the consensus forecasts. It’s unclear how long the surprise factor will remain in overdrive, but for the near term the incoming numbers may be unusually misleading.

The hefty surprises started with the release of nonfarm payrolls for April. Economists were looking for a sharp gain of nearly 1 million jobs. The actual number was a dramatically weaker rise of just 266,000.

Subsequently released numbers for consumer inflation, retail sales, industrial production and yesterday’s housing starts also posted results that were far from the consensus point forecasts. Yes, forecasting is almost always wrong, but the magnitude of the recent errors, one after the other, suggests that there’s a higher degree of noise in the numbers than usual.

The uncommonly big string of misses for expectations vs. results is fueling increasingly stark forecasts in some corners. For inflation, some economists advise that the sharp increase in pricing pressure will eventually normalize and so it’s mistake to assume that the latest surge in consumer prices is a sign of things to come.

But other dismal scientists disagree, including former Treasury Secretary Larry Summers, who yesterday warned that the Federal Reserve is making a mistake by not pre-emptively tightening monetary policy to derail higher inflation. He predicts that the Fed will soon be forced to sharply hike rates to compensate for its “dangerous complacency” with assessing inflation risk.

There are, of course, narratives that explain the various big misses. The surprisingly big decline in housing starts in April, for instance, is blamed on surging lumber prices. “This report may be the strongest evidence yet that supply constraints, namely lumber and material prices, labor scarcity, and a lack of buildable lots, are weighing meaningfully on homebuilders’ ability to keep up with housing demand,” says Fannie Mae Chief Economist Doug Duncan.

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Disclosures: None.

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