ORLANDO, Fla. Nov 17, Reuters -- If we still can't trust the numbers, shouldn't economic policymakers and investors sit tight?
In early September, the New York Federal Reserve suspended its real-time GDP growth tracker because the wildly distorted economic data of the immediate post-COVID world was unreliable.
The New York Fed posted on its site a number of challenges to the Nowcast model because of the uncertainty surrounding the epidemic and the volatility in the data.
While other major institutions have yet to follow suit, the world of economic forecasting remains largely in a state of suspended animation.
A government-mandated world recession is not based on modern historical precedent. There are no truly comparable models for economists, investors and policymakers to draw on, leaving huge uncertainties about the new world that emerges.
The biggest losses have been cyclical or trend driven analysis that investors have been glued to for decades.
With a large pinch of salt, you have a confident prediction of where employment, growth and inflation are headed over the next year or two.
A look at Citi's economic surprises indexes, which measure the extent to which incoming data is beating or missing consensus forecasts, shows how erratic the numbers are.
Between 2003 and February last year - before the outbreak of the pandemic - the average weekly change in the aggregate G 10 surprises index was just 0.03 points. Since March 1st, that average change has jumped to times larger.
The standard deviation of weekly surprises has more than doubled from 7.5, meaning the index's peaks and troughs have been far more extreme. A low standard deviation shows that data is clustered around the average, and a high reading shows that they are dispersed much more widely.
It's a similar pattern across individual economic areas. Comparable figures for the U.S. economic surprises index are lower, but are significantly higher for the euro area, where weekly surprises are 20 times greater than the average over the last 17 years.
These numbers are heavily skewed by the initial lock downs in the months after March 2020, which brought a juddering halt to economic activity across the world, and the surprisingly strong and quick rebound.
Willem Buiter, a professor of international and public affairs at Columbia University and former Bank of England policymaker, agrees that forecasting is far trickier now.
We have information, even though it is sometimes hard to interpret. He says you just have to be more careful interpreting it because the normal cyclical patterns are up in the air, as is our understanding of economic trends.
It doesn't mean that the textbooks should be rejected completely, nor should it prevent policymakers from turning to them for guidance on where to go next. Economic fundamentals still apply.
Buiter puts it: We have to look up words that we haven't had to use before. The data isn't skewing because of the effects of the pandemic, but it's still skewing the data, nowhere more than inflation. It is the highest level in decades and well above central bank targets in many parts of the world, boosted by supply bottlenecks, shortages, high food and energy prices, and yes, rising demand.
Buiter is part of a fast-growing phalanx of leading academics, financial market heavyweights and former policymakers who have urged the Fed to rethink its position that inflation is still transitory. The Fed would almost certainly raise interest rates with annual inflation running at a 30 year high before the Great Financial Crisis. The scarring from 2007-09 runs deep, so the gap between inflation and rock-bottom policy rates has never been bigger.
The fog of uncertainty that affects the visibility of post-pandemic economic data and the policy outlook has never been thicker.
San Francisco Fed President Mary Daly said that acting without clarity is risky. In the face of unprecedented uncertainty, the best policy is acknowledging the need to wait. In the end, patience is the bravest action we can take.