This Economy Is Proving Too Hard for Economists

The latest buzzword among many economists and investors is “ noise.” It’s being used to refer to any piece of economic data that doesn’t fit the prevailing narrative, which is happening a lot these days. Don’t get me wrong — this economy is proving hard to understand. It is very strong in some respects and very weak in others. The official government data shows gross domestic product just shrank for two consecutive quarters, meeting the technical definition of a recession, but it doesn’t feel like a true recession.

No sooner had the Labor Department said earlier this month that economy added 528,000 jobs in July, more than double the forecast and exceeding every one of the more than 70 estimates in a Bloomberg survey, than economists dismissed the results as “noise.” They trotted out the word again when the government said on Aug. 10 that the consumer price index was unchanged in July from the month before, an outcome all but four of 63 economists predicted. They expected an increase. And just this week we heard a lot of economists respond with “noise” when the Commerce Department said this week that retail sales for July among a control group that is used to calculate GDP rose more than forecast.

This is all very confusing to many, and I get it. But just because the data doesn’t fit Wall Street’s longstanding models that worked in the pre-pandemic era doesn’t mean that it’s ”noise.” It probably means the models are in dire need of updating.