How your company is performing is not obvious unless you compare it to something. What looks like good work could simply be a rising economy lifting even the leaky boats. Or in difficult times, you may be outperforming your competition. Looking at economic data can help you understand your own company’s performance. This article explain how to do that with the Fred database, a free source of massive economic data.
Let’s begin, though, with a story. People think of an economist as being a forecaster, which we often are, but some of my most useful work was looking at past data. One day the internal reports showed lackluster deposit growth at the bank where I worked. One executive wanted to pay higher interest on deposits. Another wanted to spend more money on marketing. I showed data that all banks, including our competitors, were having weak deposit growth. We were not losing market share at all, because it was an economy-wide phenomenon. We decided to save money by not changing anything, which more than covered the cost of my annual salary.
To look at economic data, go to Fred or if you lose that link, just do a Google search for Fred Data. (Fred stands for Federal Reserve Economic Data. It’s a project of the St. Louis Fed.)
Use the search box in the upper right hand corner. Let’s say that we are interested in oil prices. Type that into the box. The first result (at the time that I wrote this article) has a long name, but its friends call it West Texas Crude. Click on the link for “Daily” and up comes a graph.
Graphs can be changed in many ways. I often change the time period charted.
Now let’s make it interesting by adding another concept. Let’s compare oil prices to natural gas prices. Scroll down underneath the graph to the horizontal bar labeled “Add Data Series.” Click that and type Natural Gas Price. Notice that the first result has a “Discontinued” label on it. Scroll down to the first entry with daily data, which is the Henry Hub Natural Gas Spot Price. Now click the blue button “Add Series.”
Now you see the two series on the graph, but it isn’t very helpful because they are in different quantities: dollars per barrel for oil, and dollars per million BTU for natural gas. If you’re like me, you know that it takes six million BTUs to equal the energy in one barrel of oil. We’ll just multiply the natural gas price by six to compare the two fuels on an energy equivalent basis. To do this, scroll beneath the graph again and click on “Edit Data Series 2.”
Near the bottom of this box is a link for “Create your own data transformation.” Click that. A box appears labeled “Formula,” and it contains the letter a. That’s the beginning of your transformation. The “a” represents our data series. To multiply it by 6, we add “*6” after the “a.” Then click apply. It looks like nothing happens, but scroll up to the graph and you’ll see the natural gas price is now comparable to oil.
Transformations like this can be used to adjust for inflation (divide by CPI) or to find interest rate spreads (such as subtracting the interest rate on Treasury bills from the Aa corporate bond rate).
Looking at data graphically is so valuable that I have downloaded the Fred app onto my cell phone. Sitting in a meeting, I can bring up data and show it to my friends. (I’m lots of fun at parties. “Look at capacity utilization in the manufacturing sector!”)
To compare economic data with company data, you probably want to download the economic numbers. Look in the left column for the link to “Download Data.” This is a good time to think about frequency: daily, monthly, quarterly or annual. You can convert on your own spreadsheet, or you can have Fred do the conversion. Underneath the graph, in the “Edit Data Series” section, find the Frequency box and select what you want, then download the data.
My own work is a mix of one-off projects and repeat projects. For the repeat projects, I set up a spreadsheet and have Fred automatically update my data. The Fred Add-In for Microsoft Excel allows me to set up a sheet that has Fred data in it. When I am preparing charts for my free economic newsletter, I go to the Fred tab (created by the add-in) in my data worksheet, and I click the “Update Data” button. I quickly have the latest numbers for the data series that I am tracking. This saves me a huge amount of time every day.
Although Fred makes it easy for a novice to access data, it doesn’t protect you from misusing data. It’s worth understanding data definitions, limitations, and how data are collected. Right underneath the graph is a tab labeled “Notes.” It contains a link to the source of the data, where you can learn more than you ever wanted to know about your data.
Finally, Fred has so much data that it may be hard to find the right series for your purposes. Fred says they have 245,000 time series from 80 different sources, and they are adding new data regularly. A professional economist can help you find the right data sources, explain their limitations, and set up a program to regularly compare your company’s results to the external environment in which you operate.
