The U.S. government shutdown continues, what about the core data that the market is concerned about?

For investors, the core impact of the current U.S. government shutdown is that it creates a "vacuum period" for key economic data. With the postponement of major reports such as non-farm employment and CPI, the difficulty for the market to judge the economic direction and the Federal Reserve's policy path has significantly increased. Investors must turn to alternative data, but they need to be wary of its inherent limitations and potential biases.

According to Goldman Sachs' analysis, the direct impact of this shutdown on the economy is relatively controllable, with an expected weekly drag on the annualized GDP growth rate of about 0.11 percentage points in the fourth quarter, and this loss is expected to be compensated in the first quarter after the government reopens. However, the longer the shutdown lasts, the greater the uncertainty caused by the lack of data, which itself is a market risk.

This article will outline what alternative data investors can focus on during the government shutdown, their pros and cons, and the actual impact of the shutdown on the economy and data quality.

1. The Shutdown May Last Long, Data Releases Face a "Vacuum Period"

Since October 1, the U.S. federal government has officially shut down. Unlike previous instances, this shutdown may last longer. According to prediction market data, there is an 85% probability that this shutdown will last at least 10 days, similar to the situations in 1995 and 2013. If the shutdown continues beyond October 15, approximately 1.3 million military and law enforcement personnel will face salary suspensions, increasing the pressure for a compromise between the two parties.

The most direct consequence of the government shutdown is that almost all federal economic data will be postponed until the government reopens. This includes the employment report and the Consumer Price Index (CPI), which are of most concern to the market. However, there are three types of data worth noting:

1. Federal Reserve: Since its funding does not rely on congressional appropriations, it will continue to release data on time.
2. Treasury Department: The release of the Daily Treasury Statement is unaffected.
3. Unemployment claims data: Although the official report on Thursdays is suspended, states are still releasing data, which can be aggregated to obtain an equivalent national data series.

In addition, all private institutions (such as ISM, NFIB, and the World Large Enterprises Federation) are unaffected in their data releases. Historical experience shows that after the government reopens, the release dates for postponed data will be pushed back, with the delay typically being slightly longer than the duration of the shutdown, and subsequent reports may also be delayed due to backlog.

2. Observing Alternative Data: How to Navigate in a "Data Blind" Situation

In the context of missing official data, investors can continue to track the pulse of the labor market, inflation, and the overall economy by leveraging private sector data and some still available government data.

Labor Market: Goldman Sachs has updated its labor market tracking model using the available data. The results show that its employment growth tracking indicator has rebounded to a level of 80,000 per month in September after experiencing near-zero growth lows in April and May. However, a significant shortcoming of this model is its inability to effectively track government hiring trends. Notably, a federal government's "delayed resignation program" ended on September 30, which is expected to result in approximately 125,000 employee departures reflected in the October employment data, significantly dragging down employment growth for that month In terms of labor market tightness, both the conventional model and the "closed version" model using only available data show that as of August, the tightness of the labor market has fallen below the levels seen in 2018-2019, and the "closed version" model suggests that market tightness further eased in September.

Inflation Data: Although there is no high-quality data that can fully replace the official CPI, we can still glimpse inflation trends through Goldman Sachs' bottom-up model. This model uses alternative price data to forecast various major components. Preliminary estimates indicate that the month-on-month increase in core CPI in September may have slowed to 0.26%, down from 0.35% in August. Specifically, the model predicts that used car prices will rise by 0.5%, new car prices will rise by 0.1%, while airfare prices will drop by 1.5%, and rent increases will slow down.

However, investors must recognize that the risk of relying on model predictions long-term, without official data for cross-validation, is that the deviation between the model and actual inflation may accumulate unnoticed.

III. Limitations of Alternative Data: Investors Need to Beware of Two Major Traps

When using alternative data, investors need to pay attention to two key issues:

1. Not all alternative data is reliable: Many alternative data sources face the same issues as official data, such as data errors, low collection rates, significant revisions, and even unique flaws like insufficient representativeness.
2. "Soft data" may be overly pessimistic: During government shutdowns, "soft data" such as consumer and business confidence (i.e., sentiment surveys) often show a greater slowdown than "hard data" that reflects actual economic activity. This was observed during the shutdowns in 2013 and 2019, so they may exaggerate the extent of economic weakness.

IV. What is the Actual Impact of a Shutdown on the Economy?

According to Goldman Sachs' estimates, the direct impact of a government shutdown on the economy is relatively mild.

• Impact on GDP: This shutdown involves approximately 627,000 federal employees being furloughed. It is expected that each week of shutdown will directly drag down the seasonally adjusted annualized growth rate of real GDP in the fourth quarter by about 0.11 percentage points. However, once the government reopens before the end of the fourth quarter, this loss will rebound in the first quarter of next year at an equivalent scale.
• Impact on the Labor Market: The impact of the shutdown on employment data may be counterintuitive. In the non-farm payroll report (institutional survey), since furloughed employees are legally entitled to back pay once the government reopens, they are likely still considered "employed," thus having minimal impact on employment numbers. In terms of the unemployment rate (household survey), these employees should theoretically be counted as "temporarily laid off," which could lead to an increase in the unemployment rate by 0.1 percentage points. However, historical experience shows that during the shutdowns in 2013 and 2018-2019, most furloughed employees were incorrectly classified as "employed but not working," so the actual impact may be smaller

5. Data Quality Concerns: Can Delayed Data Still Be Trusted?

A prolonged shutdown can compromise the quality of the final published data in two ways.

First, the data collection process itself may be affected. For example, during the shutdown in 2013, price surveyors responsible for collecting CPI data were placed on mandatory leave, resulting in the Bureau of Labor Statistics (BLS) collecting only about 75% of the usual price samples.

Second, changes in the collection process or reference periods may introduce bias. For instance, after the shutdown in 1995, the BLS noted that changes in the survey reference week and the lengthening of the interval between the survey date and the reference week could impact respondents' answers.

Therefore, for investors, when the government reopens and releases the backlog of data, if there are "unexpected" data points that significantly differ from general expectations, they should approach these with caution, appropriately reducing their weight but not completely disregarding them.

Risk Warning and Disclaimer

The market carries risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at their own risk