A Report on the Federal Reserve Board’s Efforts to Better Assess Economic Activity Norman Morin and John Stevens Federal Reserve Board of Governors July 2015 Society for Economic Measurement Annual Conference, Disclaimer: Any views expressed here are those of the authors and do not necessarily reflect the views of the Board of Governors of the Federal Reserve System or the Federal Reserve System.

Macroeconomists face a difficult signal extraction problem Most economic data releases are characterized by: Publication lags (often lengthy) Repeated revisions (often substantial) Well-known measurement challenges (e.g., services output, input prices, etc.) Statistical noise From these noisy and incomplete data, macroeconomists are asked to discern the underlying cyclical state of economic activity through a combination of models and judgment. 2

3 Source: Bureau of Economic Analysis.

4 Source: Bureau of Economic Analysis and Board of Governors of the Federal Reserve System. Conceptually similar data sometimes tell a different story

Vision for addressing the signal-extraction problem Develop innovative sources of information and deploy a range of statistical and econometric techniques in order to achieve the best possible inference about the current state of the macroeconomy in real time, along dimensions that are especially relevant for monetary policy makers. 5

What might “success” look like? The equivalent of today’s information set is available weeks earlier. This information set has been augmented by new measures of economic activity. Possibly derived from “big data,” administrative data, or other sources. Possibly higher frequency or more disaggregated than their current equivalent measures. This expanded information set is being used in a range of statistical filtering models, more-structural econometric models, etc., to provide an improved and more timely signal about the cyclical position of the economy. This work is being supported by an active research agenda and broad engagement with academics and other professionals in relevant disciplines. 6

7 What have we done so far? We have re-oriented our focus by: Expanding the economic measurement mandate of the Industrial Output section to include exploring options for “administrative data” and “big data” Standing up a new section called “Current Macroeconomic Conditions” that will conduct inference about the cyclical state of the macroeconomy using a range of data and tools Pursuing the development of new skills We have been developing relationships with potential data providers and engaging in a fact-finding effort to learn about potential data sources (public and private) for Developing new economic measures Improving existing economic measures (including our own)

Improving the Fed’s measures of Industrial Production (IP) The Fed created IP as a “real-time” measure of economic activity The Federal Reserve Bulletin (1918) noted “…an increasing need for the development of some method of measuring in an authoritative way changes in business conditions…” By 1922, the Fed was producing 100+ series on the physical volume of trade For nearly 100 years, the Fed has continued to improve upon the data sources and methods used to estimate IP Current efforts include Exploring the feasibility of using scanner data as a high-frequency production indicator for selected industries Using daily data on temperatures and snowfall at weather stations through the country from the National Oceanographic and Atmospheric Administration to create timely adjustments for weather-related production disruptions when our data on actual production (or indicators of production) are incomplete 8

9 Source: National Oceanographic and Atmospheric Administration and U.S. Census Bureau; calculations by staff at the Board of Governors of the Federal Reserve System.

10 Source: National Oceanographic and Atmospheric Administration and U.S. Census Bureau; calculations by staff at the Board of Governors of the Federal Reserve System.

Looking for measures of consumer spending Exploring possible sources of information on consumer transactions Large retailers probably have real-time dashboards Hoping to acquire/develop a timely measure of consumer spending Motor vehicle sales data are timely—released after month-end—but can be volatile Internet search data are even more timely and may presage significant movements 11

12 Source: Wards Automotive and Google. Note: Chart prepared by Alessandro Barbarino.

Developing an indicator of new business formations Data on actual business formations from administrative records are generally comprehensive, but they become available with a long lag With colleagues at the Census Bureau and in academia, we are exploring whether another comprehensive, administrative data source—applications for Employer Identification Numbers (EINs)—can help predict new business formation EINs are required for submitting tax information to the IRS EIN application data are timely Project requires: A significant data cleaning effort Modeling the relationship between EIN applications and actual business formations 13

Potential challenges associated with such data efforts Privacy concerns associated with PII/BII Lack of incentives for many organizations to share data Potentially fickle data providers Statistical concerns Short length of time series: Impinges on business-cycle analysis Lack of representativeness: Sample-selection issues and lack of benchmark information Lack of temporal consistency: Collected information could change unexpectedly Can be expensive: Data purchases; associated IT costs; data cleaning; development and testing of new measures; skills development 14