What You Tweet Might Tell Janet Yellen It’s Time to Raise Rates

(Bloomberg) --

Your Google

search or a

tweet about

your job is

part of a vast

trove of

private

economic

information that might help Federal Reserve Chair Janet Yellen

and her colleagues get a more complete picture of where the

economy is headed.

Economists at the Fed are looking into whether non-traditional

data could improve the accuracy and timeliness of the forecasts

they put before monetary-policy decision makers about every six

weeks. First, though, they want to be satisfied about the quality

and reliability of the information.

The project comes as digital information about the economy is

exploding. Companies post billions of prices online for everything

from milk to haircuts, and households query Google Inc.’s search

engine for the best mortgage rates or car deals. Retailers also

collect billions of pieces of information about consumer

preferences by capturing data every time a customer swipes a

membership card at a grocery store or shops online.

For Fed economists, “the aspiration is to be sure we are

aggressively pushing the envelope in putting in front of policy

makers as accurate a picture of the economy as best as we can

understand it,” David Wilcox, director of the Fed Board of

Governors’ Division of Research and Statistics, said in a Feb. 10

interview.

Current forecasting methods have their shortcomings. The

economy is constantly shifting, eluding economic models that

assume fairly predictable responses to low interest rates or low

gasoline prices. Turning points are notoriously hard for

forecasters to identify.Stale Data

And government statistical information is often stale. When Fed

officials meet next week, for example, the most recent report on

their preferred inflation index will be from January.

Data the Fed collects itself, or uses from private sources, is

routinely “anonymized.” The New York Fed, for example,

produces a household debt and credit report from a national

sample drawn from anonymous Equifax credit data.

Fed officials don’t foresee private-sector data replacing their use

of U.S. government statistics on everything from inflation to how

workers flow in and out of the labor force.

The goal is to shorten “the time lag between what is happening

and what your understanding of that is,” said David Stockton, the

Fed’s former chief forecaster who is now a senior fellow at the

Peterson Institute for International Economics in Washington.

Fed economists are reviewing research papers by Google chief

economist Hal Varian on how search terms can be useful as

spending indicators, and work by University of Michigan

computer scientists and economists who have built a labor-

market indicator from social media posts. Varian and a co-author

showed in a research paper how a Google search index for real

estate agencies tracked house sales.Real-Time Estimates

“Google data seems to be helpful in getting real-time estimates

of initial claims for unemployment benefits, housing sales, and

loan modification, among other things,” Varian told the Atlanta

Fed in an interview published on the Atlanta Fed’s website last

April.

Also under review are labor market data produced by human

resources company ADP Research Institute of Roseland, New

Jersey, and Massachusetts Institute of Technology’s Billion Prices

Project, which collects online data from retailers. An associated

company, called Price Stats, produces daily, monthly and annual

price indexes.

Fed officials also intend to review research that suggests an

estimate of gross domestic product can be constructed from the

financial statements of the largest U.S. companies.

“There is a lot of data out there that could be very valuable in

trying to understand what is happening in the economy in the

real time,” said Mark Zandi, chief economist at Moody’s

Analytics Inc. in West Chester, Pennsylvania, which is assisting

ADP’s research unit with studies of its data on 24 million

employees, whose names are kept confidential.ADP Trove

Zandi calls ADP’s information a “treasure trove” that can shed

light on labor market puzzles such as why wage growth has been

stagnant. One answer Moody’s has seen in the ADP data: a lot of

the new entrants in the labor force are younger, lower-paid

workers.

The Fed Board’s interest in such data is significant because, with

some 330 Ph.D. economists on staff, it’s one of the nation’s

largest economic research organizations. About every six weeks,

approximately 60 economists in the central bank’s forecasting

unit have to come up with a detailed report on the economic

outlook for policy makers, who vote on interest rates eight times

a year.

Fed officials also have a lot of questions about the quality of

private information. Data projects inside private firms often have

sponsors, such as Varian at Google. What happens if the

sponsors go away?

Also, the samples of people who enter a search term such as

“Iphone 6” on Google may not be representative of the diversity

of consumers in the U.S. economy.

The Fed’s go-slow approach “is entirely justified,” said Stephen

Oliner, a resident scholar at the American Enterprise Institute in

Washington and a former senior adviser at the Fed Board. “You

don’t want to build big models that depend on data that are

potentially unreliable.”Social Media

Mike Cafarella, a computer scientist at the University of

Michigan who helped build its social media tool to predict initial

jobless claims, says concerns about sampling and the

sustainability of data inside private companies are important.

Still, “social media is a lot more representative of the country

than you might think,” he said.

Michigan researchers

track word sets such as “I

lost my job” in a stream of

tweets the university

receives in an arrangement

with Twitter Inc. From that

information, they produce

an index that aims to track initial claims for unemployment. They

have also had some success at identifying the

demographics of the people posting those messages, Cafarella

said. None of the University of Michigan’s data contains personal

information.

If a private company decided to shut off the supply of data, then

there would probably be other sources, he said. Use of social

media is increasing, not decreasing.Reliability Test

“We would be remiss or worse if we didn’t make an aggressive

effort to catalogue what is available and to try to rigorously test

what is useful and would pass the standard of reliability,” the

Fed’s Wilcox said.

The Fed isn’t the only central bank interested in what the

Internet can tell it about the economy. Central banks from Israel

to the United Kingdom are all looking at ways large data sets can

give them an edge.

Bank of England Chief Economist Andrew Haldane said that in

the run-up to the Scottish independence referendum last year

the central bank was concerned about possible deposit outflows

from financial institutions.

So the Bank of England set up a word tracker to monitor tweets

that referenced banks and words like “run,” “panic” and

“referenda.”

“This system could not have been put in place as recently as five

years ago,” said Haldane, at a Bank of England seminar on Feb.

25. “We are reasonably in the early throes of what is genuinely a

revolution” in data.

The Fed’s Own Data Show U.S. Manufacturers Don’t Share Its

OptimismFed Officials Stress Data Over Dates as Rate Rise Case Builds

To contact the reporter on this story: Craig Torres in Washington

atctorres3@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz

at cwellisz@bloomberg.netMark Rohner, Gail DeGeorge