With breathless anticipation, the markets and media await the release of each new economic indicator. Unemployment. Consumer confidence. Housing starts. Retail sales. Durable goods. But which of the 30 or so major monthly macroeconomic indices have the greatest impact on asset prices? And why?
New research by Thomas Gilbert, an assistant professor of finance at the University of Washington Foster School of Business, finds that investors value timing (how early data is released) over precision (how much the data will be adjusted). Almost as important as timing is the intrinsic value of macroeconomic data, which Gilbert measures as its ability to accurately forecast the Fed’s quarterly interest rate decisions as well as the nation’s GDP growth and inflation in real time.
So what is the most influential indicator? Not the monthly employment report, as many have asserted. Instead, Gilbert finds it’s the lesser known NAPM/ISM Index, a measure of new purchasing orders, that moves markets the most. The reason: it contains macroeconomic information of similar value to the unemployment report, but it is released a few days earlier.
A new measure
Previous studies have established that asset prices respond to macroeconomic announcements. But for the first time, Gilbert and his co-authors from Boston College and the Federal Reserve have demonstrated why certain announcements have a strong impact on asset prices while others do not.
They focused on the response of U.S. Treasury bond prices to each of a crowded calendar of 32 macroeconomic variables that were released each month from 1994 to 2008. Measures of timing and precision for each announcement are straightforward to track. But to achieve a more complete analysis, the researchers devised a way of also gauging the value—or “information content”—of macroeconomic releases, something that had never been done.
“Investors want to know what is the state of the economy now,” says Gilbert. “But this is a fundamentally unobservable variable. There’s no minute-by-minute color-coding system.”
So the researchers tracked the ability of each macroeconomic announcement to forecast quarterly interest rate decisions by the Federal Open Market Committee (FOMC) and to “nowcast” the nation’s gross domestic product growth and inflation rate.
Examined together for the first time, the measures of timing and value proved to have a much larger impact than precision in explaining why certain macroeconomic variables have a large impact on asset prices.
Using the logic of an earlier era, the lack of investor interest in precision might be surprising or even alarming. According to Gilbert, many macroeconomic reports are revised dramatically in the months and even years after they are initially released.
But in the current markets, Gilbert adds, investors’ ambivalence to precision of macroeconomic data may be entirely rational. “The Fed is in the same boat as you,” he says. “Every six weeks they meet to make decisions and they don’t have revised data, just what has been released.”
Gilbert theorizes that investor urgency has grown rapidly alongside the increasing abundance of macroeconomic data and the accelerating speed at which information is disseminated: “If we ran this analysis in the 1950s, my expectation is that timing would matter less and precision more than it does today. We’re in a market system that really values information delivered as immediately as possible.”
“Why Nonfarm Payroll is not the King? The Information Content, Timing, and Revision Noise of Macroeconomic Announcements,” is the work of Thomas Gilbert of the UW Foster School, Chiara Scotti and Clara Vega of the Federal Reserve System Board of Governors, and Georg Strasser of the Boston College Department of Economics.