March 14, 2014
Every month the Commerce Department, the Census Bureau, the Bureau of Labor Statistics, the Federal Reserve, and a variety of private organizations release more than 40 different economic indicators. Because there are so many indicators to watch and they often move in different directions, it is sometimes difficult to see the overall picture. However, you can become an armchair economist and do a good job of determining where the economy is headed by focusing on just six indicators.
Stock market. When investors get nervous the stock market quickly takes a hit. The catalyst could be higher interest rates as the Fed tightens policy, some overseas event like the Russian invasion of the Crimea, or even government action such higher taxes. But be careful. The stock market is volatile and needs to register a decline of at least 10% to be meaningful. Right now the stock market is close to a record high level.
Orders. For manufacturing firms the first sign of trouble is likely to be a drop in orders. If sustained a smaller order book will require cuts in production. Like the stock market this series is extremely volatile as the transportation category swings dramatically. A large order for a Boeing 787, a B-1 bomber, or an aircraft carrier can easily cause orders to surge by 2.0% in one month but then decline just as rapidly the next month as orders return to normal. To eliminate some of this volatility economists focus on non-transportation orders and then average the data for three months to determine the trend. In this case orders have leveled off in recent months. If the economy was in jeopardy the decline would be far more dramatic.
Workweek. If a firm experiences slower sales, how does it respond? The drop in sales could be temporary in which case it would be imprudent to quickly lay off workers. It may be more appropriate to cut the hours worked by existing employees to “weather the storm”. If the sales slump continues layoffs may ultimately become necessary. But if sales rebound the firm can quickly boost production by lengthening the workweek. In this instance the workweek has fallen 0.3 hour in the past three months which is a lot. However, the decline occurred in December, January, and February during which time the weather was terrible. Our guess is that firms literally “weathered the storm” by cutting hours worked. We expect this series to turn upwards in March and April.
Building permits. The biggest ticket item in a consumer’s budget is their house. If consumers get nervous they can easily defer the purchase of a new home. Thus, the housing sector is typically the first sector to turn down when the pace of economic activity slips, and the first to rebound as it recovers. In most states builders must first obtain a permit before beginning construction so building permits are a good barometer of changes in this crucial sector. Like other indicators permits can be volatile primarily because a permit for a very large apartment complex can skew the data higher for that month. To smooth out some of this volatility economists will typically look at a 3-month average of total permits as well as permits for single family homes. In recent months both of these series have slowed, but given the weather permits should rebound in the months ahead.
Initial unemployment claims. This series is a measure of layoffs and the data are available weekly. If the economy sours and firms begin to lay off workers, that change in behavior will quickly become apparent as workers file for unemployment benefits. Any weekly series is extremely volatile. Thus, the focus is typically on a 4-week moving average of claims which has been bouncy in recent months as bad weather and holidays have caused the data to fluctuate. But in the past couple of weeks claims have returned to the lowest levels thus far in the business cycle. Apparently firms deem the recent drop in orders and sales to be temporary and expect the pace of economic activity to rebound quickly.
Consumer sentiment. Consumers can get nervous for any number of reasons. Whatever the cause, if they experience any sort of angst they may soon cut back on spending. Thus, measures of consumer confidence can be important barometers of changes in economic activity. There are two primary measures of confidence – one from the University of Michigan (consumer sentiment) and one from the Conference Board (consumer confidence). The trends are similar but can diverge in any given month. Right now it appears that the consumer has largely shrugged off higher mortgage rates, bad weather, and the situation in the Ukraine. Perhaps confidence has held up because the stock market has moved steadily higher which bolsters both confidence and net worth. Confidence will rebound and GDP growth will accelerate as the weather returns to normal.
Being an armchair economist can be fun if you know where to look. Try these six indicators for a while and see if you can beat the pros. As we see it only one of these indicators, the nonfarm workweek, has registered any meaningful decline in recent months and we expect it to rebound as spring arrives. What do you think?
Stephen Slifer
NumberNomics
Charleston, SC
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