Why doubts over economic data matter more in the US than China

Concerns about the reliability and quality of China’s economic figures are well known, but unease exists beyond Beijing
In the US, misinformation and partisanship are skewing the data, so much so that it is shaping the economic narrative and exerting an influence on politics and policy

Nicholas Spiro

Published: 4:30pm, 1 Feb 2024

Why you can trust SCMP

In 2019, economists at the San Francisco branch of the US Federal Reserve published a paper examining the extent to which China was “fudging” its economic statistics. Like many analysts, they used an alternative source of data to gauge Chinese growth, opting for imports – on the grounds that exports reported by China’s trading partners were externally reported statistics “unexposed to domestic manipulation”.

Concerns about the reliability and quality of data in China are hardly new but they have intensified since the country became more deeply integrated into the global economy. Part of the problem is the inherent difficulties in trying to get a clear picture of what is happening in a huge economy transitioning from central planning to free markets and struggling to keep up with the statistical requirements for measuring output in a consumer-oriented economy.

However, the lack of confidence in China’s data has been exacerbated by increasing clampdowns on access to sensitive information under President Xi Jinping, making it more difficult for China-watchers to gain deeper insight into the state of the economy, not to mention policymaking in Beijing.

Yet distrust of statistics is not just confined to China. There is also a significant trust deficit – one which could prove hugely consequential – in the United States. The problem with China’s data is that it is unreliable. In the US, by contrast, it is skewed by political partisanship, so much so that it is shaping the economic narrative and exerting influence on politics and policy.

It is bad enough that investors are struggling to interpret data correctly in the world’s biggest and most influential economy. Not only has this caused wild swings in the prices of bonds and stocks, it has created unrealistic expectations that the Fed will cut interest rates aggressively this year despite a persistently strong jobs market and exceptionally loose financial conditions that risk fuelling inflationary pressures.

To revive confidence in China’s economy, clear and reliable data is essential

However, the gap between perception and reality is much wider when it comes to soft data, such as business and consumer surveys. Objectively speaking, the US economy is performing extremely well compared with its peers. Inflation has fallen sharply in the past year. According to some measures, the Fed has already met its inflation target of 2 per cent.

Moreover, gross domestic product expanded by a stronger-than-expected 3.1 per cent last year, making the US the fastest-growing advanced economy, defying lingering fears of a recession. Most investors are convinced the US is heading for a “soft landing”, whereby inflation is quelled without causing a recession.

Yet the optimism is not reflected in surveys of current economic conditions. A closely watched index of consumer sentiment published monthly by the University of Michigan stands close to levels last seen during the acute phase of the pandemic.

The pessimism partly stems from extreme political polarisation. For respondents identifying as Democrats, current economic conditions are better than they were before the Covid-19 pandemic erupted, but for self-identified Republicans the economy has barely recovered. The partisan divide extends to inflation expectations, with Republicans less confident than Democrats that inflation will return to 2 per cent in the next five years.

A construction worker carries a ladder at a site in Los Angeles on January 31. The recent growth in US labour costs slowed in the fourth quarter. This could lead to the moderating of wage inflation that would give the Fed room to start cutting interest rates. Photo: EPA-EFE

Misinformation and misperceptions have already had a pernicious impact on US politics, and now they are impairing the quality of economic data. In a paper published in an MIT journal last year, a group of US-based economists noted a “substantial increase in the effect of partisan bias on survey-based measures of economic expectations”.

To be sure, other forces are at work. Although inflation has come down, many prices continue to rise, making consumers nostalgic for the cost of living before inflation took off. Furthermore, despite a remarkably resilient labour market, the sharp increase in borrowing costs is taking its toll on growth, with a steep rise in delinquency rates on credit card loans and a slowdown in bank lending.

Yet political bias is undeniably a factor in explaining the huge disconnect between the relatively strong performance of the economy and how some Americans are feeling. The implications for US politics and monetary policy are significant.

Even though the economy has added 14 million jobs since US President Joe Biden took office, only a third of Americans approve of his job performance. More worryingly for Biden and Democrats, half of African-Americans disapprove of his presidency, according to a recent survey by the Pew Research Centre.

Not only is Donald Trump leading Biden in national polls, 51 per cent of voters in battleground states said they believed Trump would do a better job of managing the economy, the findings of a poll published on Wednesday revealed. This could be because some Americans felt better off under Trump, who left office before inflation and interest rates soared. But it also shows how political bias is shaping the economic narrative regardless of the relatively rosy hard data.

Public misperception and scepticism of economic statistics also pose a challenge for the Fed, which is under pressure to cut rates sooner rather than later. While many things could happen between now and the election, monetary policy is likely to become more politicised, making it more difficult for the Fed to reduce rates without being accused of taking sides in the election and stoking inflation.

Many leading economies are suffering from declining trust in economic data. While the reasons vary, the stakes are higher in the US because the trust deficit has global implications. China’s data reliability problem could appear relatively inconsequential by the end of this year.

Nicholas Spiro is a partner at Lauressa Advisory