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Chapter 1. The Lock-Up > U.S. Economic Indicators

U.S. Economic Indicators

It may be hard to believe all this action and reaction can be triggered by just a single statistic. If you multiply that by more than 50 economic indicators that are released every week, month, or quarter, you begin to understand why the stock, bond, and currency markets are in a perpetual state of motion. Among the other influential economic indicators that can rattle financial markets are consumer prices, industrial production, retail sales, and new home construction. It is precisely because these indicators can so easily sway the value of investments that the government takes extraordinary steps to control the flow of sensitive economic information.

That wasn't always the case. Thirty years ago, barely any guidelines applied to the release of economic reports. A lock-up room was a term reserved for prisons, not press rooms. The lack of strict ground rules on the publication of these influential statistics created the perfect climate for abuse. Politicians tried to control the release of economic news to score points with voters. When President Nixon heard the Commerce Department was about to go public with an upbeat figure on housing starts, he pressed the agency to time the release for maximum political effect. On those occasions when economic figures turned out to be a liability, Nixon sought to hold up the report until such time he believed its release would get little notice.

Even Wall Street firms realized that big money could be made off the economic numbers given the lax supervision of their release. Some brokerages went so far as to dish out large amounts of money to reporters who were willing to leak economic news to the firm's traders before writing about it. Anyone who got an advance peek at the economic statistics stood to gain millions in a matter of minutes by knowing which stocks and bonds to trade. Eventually this blatant manipulation of the economic indicators led a furious Senator William Proxmire to schedule Congressional hearings in the 1970s on how these reports are released. Later that decade, the government set up a strict calendar that included rigid rules on how economic data would be distributed. Today, nearly every major economic indicator is released under tight lock-up conditions, which has enhanced the integrity of how the public gets such sensitive information. Trading based on inside information of economic indicators is now virtually unheard of.

This still leaves us with the most important task of all, though. How do you decipher what all these indicators actually tell us about the economy? After all, at least four key economic indicators are released on a weekly basis, 43 every month, and nine each quarter. Do we really need so many measures? Absolutely. The U.S. is the largest and most complex economy in the world. No single indicator can provide a complete picture of what the economy is up to. Nor is there a simple combination of measures that provide a connect-the-dots path to the future. At best, each indicator can give you a snapshot of what conditions are like within a specific sector of the economy at a particular point in time (see Table 1A). Ideally, when you piece all these snapshots together, they should provide a clearer picture of how the economy is faring and offer clues on where it is heading.

Yet even if you took the time to absorb every bit of economic information and monitored each squiggle in the indicators, don't expect to uncover a crystal-ball formula that can single-handedly forecast what consumer spending, inflation, and interest rates will do in the months ahead. That's because there are some important caveats when dealing with economic indicators. First, they often fail to paint a consistent picture of the economy. Different indicators can simultaneously flash conflicting signals on business conditions. One can show the economy improving, while another may point to a clear deterioration. For example, the government might report a drop in the unemployment rate, normally a bullish sign for the economy. However, a different employment survey might show a day or two later that companies are laying off workers in record numbers. You're now presented with two contradictory portraits on labor market conditions, both covering the same time period. Which should you believe?

The confusion doesn't stop there. Another complication, one especially maddening to investors and economists, is that people can behave counterintuitively. Just look at two ostensibly related reports: consumer confidence and consumer spending. The first measures the general mood of potential shoppers; if they are upbeat about the economy, it stands to reason they will spend more. If there is widespread gloom and uncertainty about the future, logic would lead you to believe people will curb their spending and save money instead. However, that's not the way it plays out in the real world. There appears to be little relationship between these two measures. During the mild 2001 recession, consumer confidence kept plummeting throughout the year, reaching levels not seen in decades. Yet these same consumers not only refused to cut back on spending that year, they bought homes and cars at a record pace. Obviously, one cannot determine the outlook for consumer spending just by monitoring the psychological state of American households. The inclination to spend is influenced by many factors, including personal income growth, job security, interest rates, and the build-up in wealth from the value of one's home and the ownership of stocks and bonds.

There is also the quandary that comes with abundance. Everyone—from the professional money manager down to the mom dabbling part time in the markets—can be overwhelmed by the statistical minutia out there. How do you discern which indicators are worth watching and which ones to view with skepticism or even ignore? How does an investor employ economic indicators to help choose which stocks and bonds to buy and sell, and when? Which measures should a business forecaster follow to spot coming economic trends? What key indicators should corporate chiefs rely on to help them decide whether to hire new workers or invest in new equipment?

You can find the answers to these questions in subsequent chapters, but clearly some economic indicators are far more telling than others. Generally, the most influential statistics, those most likely to shake up the stock, bond, and currency markets, possess some of the following attributes:

  • Accuracy: Certain economic measures are known to be more reliable than others in assessing the economy's health. What determines their accuracy is linked to how the data is compiled. Most economic indicators are based on results of public surveys. Getting a large and representative sample is thus a prerequisite for accuracy. For instance, to measure the change in consumer price inflation, the government's Bureau of Labor Statistics sends out agents and conducts telephone interviews every month to find out how much prices have changed on 80,000 items and services at 23,000 retail outlets around the country. To calculate shifts in consumer confidence, the Conference Board, a business research organization, polls 5,000 households each month.

    Another variable is the proportion of those queried who actually came back with answers. How quickly did they respond? The bigger and faster the response, the better the quality of the data and the smaller the subsequent revisions. If an indicator has a history of suffering large revisions, it generally carries less weight in the financial markets. After all, why should an investor buy stocks or a company hire additional workers when the underlying economic statistic is suspect to begin with?

    The monthly construction spending report by the Commerce Department is one that gets substantially revised and is thus often ignored by the investment community. In contrast, housing starts figures are rarely revised, which is why this indicator is taken far more seriously.

  • Timeliness of the indicator: Investors want the most immediate news of the economy that they can get their hands on. The older the data, the more yawns it evokes. The more current it is, the greater the wallop it packs on the markets. Case in point: Investors pay close attention to the employment situation report because it comes out barely a week after the month ends. In contrast, there's far less interest in the Federal Reserve's consumer installment credit report, whose information is two months old by the time it's released.

  • The business cycle stage: There are moments when the release of certain economic indicators is awaited with great anticipation. Yet those same indicators barely get noticed at other times. Why do these economic measures jump in and out of the limelight? The answer is that much depends on where the U.S. economy stands in the business cycle. (The business cycle is a recurring pattern in the economy consisting first of growth, followed by weakness and recession, and finally by a resumption of growth again. We'll take a closer look at the business cycle in the next chapter.) During a recession, when there are lots of unemployed workers and idle manufacturing capacity, inflation is less of a concern. Thus, measures such as the consumer price index, which gauges inflation at the retail level, do not have the same impact on the financial markets as they would if the economy were operating at full speed. During recessionary periods, indicators that grab the headlines are housing starts, auto sales, and the major stock indexes because they often provide the earliest clues that an economic recovery is imminent. Once business activity is in full swing, inflation measures like the CPI take center stage again while the other indicators recede a bit to the background.

  • Predictive ability: A few indicators have a reputation of successfully spotting turning points in the economy well in advance. We mentioned how housing and auto sales as well as the stock indexes have such characteristics. However, other less-known measures are harbingers of a change in business activity. One such indicator is the advance orders for durable goods. Generally, economic gauges known for being ahead of the curve carry more weight with investors.

  • Degree of interest: Depending on whether you're an investor, an economist, a manufacturer, or a banker, some indicators might be of greater interest to you than others. Business leaders, for instance, might focus on new home sales and existing home sales figures to see whether Americans are in a shopping mood. By monitoring such statistics, companies selling furniture and appliances can decide whether to expand operations, invest in new inventories, or shut down factories.

Those in the forecasting business want to know what's ahead for the economy and thus concentrate on a set of measures known as “leading indicators.” These include initial unemployment claims, building permits, the ISM purchasing managers report, and the yield curve.

Investors in the financial markets also have their favorite indicators; the specific measures they watch depend on what assets are at greatest risk. Those trading stocks focus on indicators that foreshadow changes in consumer and business spending because they can affect future corporate profits and the price of shares (see Table 1B). For bond traders, the looming concern is not company profits but the outlook for inflation and interest rates. Any evidence suggesting that inflation might accelerate can hurt bonds. (See Table 1C for the economic indicators most sensitive to the bond market.) Players in the currency markets look for economic news that can drive the dollar's value up or down. Signs pointing to a robust U.S. economy, for example, normally lure foreigners to invest in this country, especially if the other major economies show comparatively little growth. That lifts the greenback's value against other currencies. (See Table 1D for the measures most likely to move the dollar.)

Table 1B. Economic Indicators Most Sensitive to Stocks
1Employment Situation Report (Payroll Survey)25
2ISM Report—Manufacturing147
3Weekly Claims for Unemployment Insurance38
4Consumer Prices245
5Producer Prices255
6Retail Sales62
7Consumer Confidence and Sentiment Surveys86 and 91
8Advance Report on Durable Goods116
9Industrial Production137

Table 1C. Economic Indicators Most Sensitive to Bonds
1Employment Situation Report (Payroll Survey)25
2Consumer Prices245
3ISM Report—Manufacturing147
4Producer Prices255
5Weekly Claims for Unemployment Insurance38
6Retail Sales62
7Housing Starts169
8Chicago Purchasing Managers Report216
9Industrial Production/Capacity Utilization137

Table 1D. Indicators That Most Influence the U.S. Dollar's Value
1Employment Situation Report (Payroll Survey)25
2International Trade223
4Current Account237
5Industrial Production/Capacity Utilization137
6ISM Report—Manufacturing147
7Retail Sales62
8Consumer Prices245
9Weekly Claims for Unemployment Insurance38
10Productivity and Costs275

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