Wealth managers weigh in on the brewing controversy over BLS data

The old Mark Twain quip that there are “lies, damned lies, and statistics” has perhaps never been timelier in the wake of the recent kerfuffle over the government’s July jobs report.

But while the widely revised number became widely reviled by President Trump, wealth managers are taking the now politicized issue with their usual grain of salt – at least for now.    

President Trump dismissed Bureau of Labor Statistics (BLS) Commissioner Erika McEntarfer earlier this month in the aftermath of July's weak employment report, which featured downward revisions to previous months. The BLS had reported that July saw just 73,000 new nonfarm payroll jobs, while May and June’s numbers were sharply revised downward to 19,000 and 14,000 respectively, marking the largest revision since 1968.

The revisions, though unusually large, were not without precedent. The BLS releases preliminary job estimates based on incomplete survey data, supplemented by models, and then updates the figures when more surveys are returned.

Still, President Trump felt the revision was too large to ignore and moved to overhaul the BLS. He has since said he will nominate economist E. J. Antoni as BLS commissioner.

Financial advisors, however, say they have no trouble ignoring a lot of the numbers that come out of Washington each month – to a point.

Austin Graff, chief investment officer at 49 Financial, for example, says he doesn’t rely on the headline BLS data the day of the report. Instead, he looks more at historical data and how it is trending over time rather than focusing on a single point estimate. 

“It hasn’t been a secret that there have been a rising number of meaningful revisions since COVID. The significant revisions have pushed us towards looking at a more expansive dataset,” Graff said.

Similarly, Matt Gotlin, chief investment officer and managing director at Choreo, says the BLS monthly employment figures are but one of thousands of inputs that guide his information flow, but with a long-term investment perspective.

“Generally speaking, short-term data points have little impact directly on allocations. It is important to note that a portion of labor market reports are lagging anyway and should not necessarily be considered a good read on current or future economic direction,” Gotlin said.

Elsewhere, Spencer Carlson, managing partner at Chappell Wealth Management a partner firm of Sanctuary Wealth, agrees that the monthly jobs report isn’t a big factor for portfolio strategy, adding that making modifications to long-term portfolios based on such volatile short-term data isn’t common.

“We pay attention to the monthly jobs data to be aware of what might be driving volatility, and to understand the thinking behind other fiscal and monetary policy decisions to help guide client conversations,” Carlson said.

SEARCHING FOR ALTERNATIVE DATA

Given the current controversy, 49 Financial’s Graff believes alternative data sources can be helpful, but he also thinks it’s important to focus on the data that is directing policy marker decisions. Going forward he will look to focus on the trend of BLS data, including revisions, while also analyzing comments from companies that they own to get a better feel for how the environment is affecting business fundamentals. 

“At the end of the day, we want to understand what data is impacting policymaker decisions and how the data is impacting company profitability. We will look at various forms of data to give us a better understanding of the current economic environment and where the economy may be heading,” Graff said.

Mike Martin, vice president of market strategy at TradingBlock, feels the only comprehensible alternative today is the private ADP National Employment Report. That said, in his view the data from ADP is “even more volatile and unreliable than the BLS.”

“I would welcome another credible economic data source, as most serious money managers and investors would. The challenge is determining how such a source could be created and whether it could produce accurate, consistent results. If so, it would provide much-needed visibility into the currently opaque jobs market,” Martin said.

Realistically, the market’s best bet is a complete revamp of the current BLS model given the vast amount of data required to produce an accurate jobs report, according to Martin.

As for the President’s shakeup at the BLS, Chappell’s Carlson doesn’t believe E.J. Antoni is a responsible pick as the new head. Furthermore, he believes it would take a significant amount of time and effort to bias the jobs numbers, and those efforts wouldn’t go unnoticed.

“At this point, I haven’t seen evidence to suggest that the new BLS commissioner is likely to be successful at making partisan changes,” Carlson said.

TALKING WITH CLIENTS ABOUT DATA

With all the questions surrounding the data coming out of Washington, the question arises: What should wealth managers be telling clients when they ask about the veracity of the government data?

“For the last few years we have been clearly communicating with clients that it would be irresponsible to focus on a single economic datapoint given the amount of noise in headline numbers.  This isn’t the first month where we have seen significant backward revisions and shouldn’t have been a secret to anyone who was paying attention,” Graff said. 

Instead of being dogmatic, Graff is emphasizing the importance of being nimble and forward looking in our investment approach.

“With regard to investments, public questioning and politicization only really matter to the point that they impact policymaker decisions or corporate fundamentals. We choose to stay focused on what matters and try to help our clients see through the noise,” Graff said.

Finally, Carlson noted that he has clients across the political spectrum, and it can be "exhausting trying to keep track of where each client stands and tip toeing around how straightforward numbers are presented."

"At the end of the day, I try my best to do what I’ve always done and communicate numbers truthfully regardless of whether they’re positive, negative or neutral for the state of the economy,” Carlson said.