Here's one reason to doubt the reliability of data used by the Fed to determine how aggressive it needs to be to tame inflation, according to Fundstrat
- The plunging response rate of various economic surveys could call into question the reliability of Fed forecasts, according to Fundstrat.
- Low response rates could be overstating the tightness of the labor market.
- "How accurate is the surge in 5 million additional job openings, when there are 1/3 fewer respondents?" Fundstrat's Tom Lee asked.
An ongoing plunge in response rates for popular economic surveys could call into question the reliability of forecasts made by the Federal Reserve, according to Fundstrat's Tom Lee.
In a Tuesday note, Lee highlighted that survey response rates for the Consumer Price Index, nonfarm payrolls, and Job Openings and Labor Turnover Survey (JOLTS) has collapsed this year. The CPI response rate is down to 37.7%, the NFP response rate is down to 44.8%, and the JOLTS response rate collapsed from 44% to 31% over the past year.
"It is the JOLTS report that really caught my eye... JOLTS response rate has collapsed from 44% to 31% since 2021, at a time when job openings surged to 12 million from 7 million... How accurate is the surge in 5 million additional job openings, when there are 1/3 fewer respondents?" Lee asked.
Lee is implying that the JOLTS survey may be overstating just how tight the labor market actually is, and that could call into question the Fed's continued policy to tighten financial conditions and raise interest rates. By comparison, the JOLTS survey response rate was 68% in 2012, Lee observed.
"There might be far few job openings than JOLTS implies," Lee said, adding that it could result in the Fed changing its future rate hiking trajectory.
The current JOLTS data suggests for every unemployed American looking for a job, they have 1.7 job openings to choose from. But if the JOLTS data is in fact overstated and less reliable, as Lee suggests, there may only be 1.0 job openings for every unemployed American.
Lee bases his estimate on recent data from LinkedIn economists that suggested the JOLTS data is overstating the tightness in the labor market.
"The most important takeaway for me is that investors are putting too much faith on taking the Fed at 'face value," Lee said.
"If JOLTS sampling size is shrinking (response rate falling), then the JOLTS report might be less indicative of true underlying job opening trends... in other words the 'tail' would point to a softer jobs market, not stronger. Hence, would imply Fed could make a dovish adjustment when this gap is potentially resolved," Lee concluded.
Any dovish pivot from the Fed is likely to drive a relief rally in stock prices after their shellacking in 2022. Lee continues to believe that inflation is falling a lot faster than most expect, and that could lead to a year-end rally in the stock market as the Fed adjusts to changing economic conditions.