Economic Noise vs Signal
Googling “Australian economy” after the release of the June quarter national accounts, I saw the following headlines among the top results:
- ‘Worst Growth: Grim Outlook for Economy’
- ‘Australia’s Economy Fares Better than Expected as Govt Spending Fuels Growth’
As so often happens with economic news, the numbers can be interpreted any number of ways depending on the story the publication wants to tell. And even then, the relevance of these statistics doesn’t really tell us anything about the future.
It’s not often appreciated but the economic indicators that preoccupy Australia’s media are yesterday’s news – literally. Unlike markets, these data reports are backward-looking. And that has implications for investors who seek to discern signals about expected returns from statistical noise.
For example, the quarterly national accounts, are intended to provide a comprehensive snapshot of the economy’s output. The challenge for an investor is these numbers come out more than two months after the end of the last quarter, so they are out of date as soon as they are released. Markets, by contrast, don’t wait for official announcements.
What about recession headlines? In Australia, we define a recession as two consecutive quarters of negative growth in gross domestic product. But given these data lags, by the time a recession is called, the worst of its impacts on markets has usually passed.
Adding to the economic noise is that different indicators may tell different stories. For instance, despite weak GDP data, Australia’s unemployment rate in July was at 4.2%, more than two percentage points below the average rate recorded from 1978 to 2024.1 Inflation in July also remained above the top of the Reserve Bank of Australia’s 2-3% target range.2
In any case, what matters for markets is not what happened in the June quarter, but what comes next. And we can see in the news headlines that there is a wide range of opinions on that score.
Confused? You don’t need to be. The good news is that today’s market prices aggregate all those varied opinions about future economic developments and their impact on stock returns. This doesn’t mean the market is always right, but it does mean this is the best estimate we have about the economy going forward.
As to conflicting messages about the economy, you can deal with those by building a diversified portfolio and using as your benchmark how you are travelling toward your long-term goals.
Confusing Economic Signs
Google search snapshot from 4 September 2024
This article originally appeared in Short N Sweet, a newsletter for Dimensional clients.
Footnotes
- 1. Labour Force, Australia, July 2024, Australian Bureau of Statistics, 15 Aug 2024.
- 2. Monthly CPI Indicator, July 2024, Australian Bureau of Statistics, 28 Aug 2024.
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