Why Trump's Leak on Jobs Data Was So Ominous

(Bloomberg Opinion) -- President Donald Trump’s Twitter feed is now a must-read for Wall Street traders, if it wasn’t already, after he gave them an early head’s up on the latest unemployment numbers. Markets moved higher on Friday before the data’s official release, because Trump had already indicated that good news was on the way.

As critics promptly noted, Trump’s tweet violated longstanding norms – protocols that exist for a reason. Ever since the government got into the business of crafting measures for assessing the economy’s health, traders have sought to gain an edge by getting the numbers before everyone else.

The problem dates to the late 19th century. At that time, the most closely watched government statistics had nothing to do with employment. Instead, it was the U.S. Department of Agriculture’s estimates of crop production that drew speculators’ attention. These proprietary estimates had the power to move global markets.

From the beginning, the Agriculture Department took precautionary measures to keep them secret before their official release. Only three people compiled the final figures: the chief of the Bureau of the Statistics and two other statisticians. Once settled, they would be released via telegraph.

At first, these individuals could leave the government building after finishing their work ahead of the official announcement. In 1904, rumors that someone had managed to get access to the data in advance prompted the bureau’s chief, John Hyde, to keep his two advisers in the building until after the figures became public.

Little did he know, though, that one of his trusted statisticians, Edwin S. Holmes Jr., had been leaking the data to a New York cotton trader, Louis Van Riper, in return for a share of the profits made from insider trading.

After Hyde instituted the lockdown, Holmes and Van Riper worked out a clever system for communicating the information. Before the final figures were worked out, Holmes and Van Riper made an educated guess as to what the numbers would be. After Holmes got access to the actual figures, he sat at his desk, which had a window with a shade.

If the final numbers closely matched the working estimate, Holmes pulled the shade halfway down. If they ended up higher or lower, he would raise or lower the shade above or below that midway point, according to a scale the pair worked out in advance.

The arrangement fell apart in June 1905 after Holmes used his window shade semaphore to send information, not realizing that Hyde had subsequently altered the numbers. When Van Riper botched the trade, the scheme came to light. Holmes was prosecuted, Hyde resigned, and the USDA instituted extreme measures to prevent future leaks.

By the 1960s, these precautions had assumed what the Wall Street Journal described as a “cloak-and-dagger aura.”

Throughout the year, government statisticians gathered to review envelopes containing regional data in order to generate national figures. This special wing of the USDA would be locked off -- doors secured, blinds wired shut and sealed with metal, phone lines cut, and the corridors outside patrolled by armed guards. “Absolutely no one is allowed to leave,” the Journal observed. A physician would join the statisticians to tend anyone who fell ill, and if someone had to go to the hospital, an armed guard would accompany them.

Unfortunately, other departments in the executive branch didn’t take the same precautions, and by the 1960s and 1970s, it was apparent that insiders had been leaking data on unemployment, inflation and other market-moving indicators. In 1972, George Shultz, then the head of the Office of Management and Budget, expressed concern about “lapses” in the protection of government figures.

Action was finally taken after a Washington Post article in 1974 quoted an anonymous Commerce Department source who described the problem: “There is a temptation for Cabinet types out on the political hustings to puff up their own egos, and give the audience a feeling it is in the presence of greatness by telling them what they will be reading in the papers or seeing on television…”

In response, the Bureau of Labor Statistics stopped supplying Cabinet officials with sneak peaks at the data. Only Alan Greenspan, then serving as chairman of the Council of Economic Advisers, got an advance look at it. As Julius Shiskin, commissioner of the BLS, explained to Congress, “If we now have leaks it will be the BLS staff or Mr. Greenspan -- or the President.”

Secrecy, though, still proved difficult to attain. “Somebody’s leaking the figures," Shiskin complained in 1977. "We’ve had a lot of complaints about it.” The evidence suggested that the leaks took place minutes before the official release time at 10 A.M. In response, Shiskin began releasing figures earlier, just before the markets opened.

Yet rumors of leaks persisted into the 1980s, prompting yet more precautions. Reporters given advance access to BLS and Commerce Department figures had to sit in special “holding rooms” cut off from the outside world.

But the problems persisted on the inside: An official investigation of the department’s Bureau of Economic Analysis found a “shockingly poor security atmosphere.” It also discovered evidence of a suspicious number of long-distance calls from statisticians to major brokerage houses.

More attempts at reform followed in succeeding years: reductions in the number of statisticians with access to data; “lockdowns” akin to those used at the USDA; new penalties for the premature release of government statistics.

Eventually, with the rising threat of computer hacking, elaborate security protocols were adopted. In 2012, for example, the Labor Department implemented new procedures designed by the “Red Team,” a group overseen by Sandia National Laboratories. These measures have plugged most leaks that once plagued the release of sensitive economic data.

Until now, the reformers who built the elaborate protocols protecting government economic data never seriously contemplated the possibility that the president would end up being the weakest link in this chain of secrecy, even if they understood that the system was only as reliable as the person at the top.

Sadly, that person has proved unreliable indeed.

©2018 Bloomberg L.P.

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