Part 3 – An Overiew of our Key US Macro Indicators

In part 3 of our webinar we dissect and examine the key US macro economic indicators that will help us to understand the underlying growth of the US economy. This list will include mainly consumption indicators like retail sales, personal spending, factory orders, durable goods orders, motor vehicle sales, home sales and other measures that can gauge economic activity from various sectors.

Launch Full Replay of Webinar

See Part 1 of this Webinar Here: Part 1: USA – The World’s Largest Economy, Some Figures and Stats, the Debt Limit and Budget Debates
See Part 2 of this Webinar Here: Part 2: GDP Components – Consumption, Investment, Government, and Trade

Retail Sales

• Retail sales measure the total receipts at stores that sell durable and non-durable goods, including restaurants and drinking places.
• Retail sales give us a sense of how much consumers are spending. The retail trade sector makes up about 5.6% of US GDP and 15% of its employment. Therefore its a good measure of the overall aggregate demand in the economy.
• Released monthly, around mid-month. –Feb 15th (for Jan.) 0.3%, forecast 0.5%, pr. 0.6% (Dec)
• Provided by Bureau of Census.

Personal Spending

• Change in the total value of inflation-adjusted expenditures by consumers;
• Personal outlays include consumer purchases of durable and nondurable goods, and services.
• Released monthly, end of the month. •Carries slightly less weight as we already know retail sales figures.
• But it is more comprehensive, and what is used for GDP calculations. –Feb 28th, 0.2% for January, forecast 0.5%, pr. 0.5%
• Provided by Bureau of Economic Analysis.

Vehicle Sales

• Annualized number of cars and trucks sold domestically during the previous month.
• Released monthly, about 2 days after the month ends. –Mar 1st., 13.4M (for Feb.), forecast 12.7 million
• Since cars are such a big purchase, vehicle sales can be a good measure of consumer confidence in economy and their financial position.

Manufacturing – Durable Goods Orders

• Change in total value of new purchase orders placed with manufacturers for durable goods.
• Released about 26 days after the month ends.
• We look at core durable goods – excluding transportation.
• Also important to note orders for capital goods excluding aircraft and military.

Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provide insight to demand for items such as refrigerators and cars, but also business investment such as industrial machinery, electrical machinery and computers. If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business.

Increased expenditures on investment goods set the stage for greater productive capacity in the country and reduce the prospects for inflation.

Manufacturing – Factory Orders

• Change in total value of new purchase orders placed with manufacturers.
• Released about 35 days after the month ends.
• Contains revision of durable goods orders.

Industrial Production

• Change in total inflation-adjusted value of output produced by manufacturers, mines and utilities.
• Released about 16 days after the month ends.
• Leading Indicator of economic health. We look at core durable goods – excluding transportation.

Capacity Utilization Rate

• Percentage of available resources being utilized by manufacturers, mines, utilities.
• Leading indicators for inflation. If producer nears full capacity, they respond by raising rates.

ISM Manufacturing Index

• Survey of purchasing managers in 400 firms.
• Released monthly on the first business day after the month ends.
• Diffusion index, survey of conditions, reading above 50 means expansion.
• Measures business conditions including employment, production, new orders, prices, supplier deliveries, and inventories;

NY Fed Empire Manufacturing Index and Philly Fed Manufacturing Index

• Released monthly, around the middle of the current month.
• Survey of conditions, reading above 0 indicate better.
• Leading indicator of manufacturing activity. Richmond Fed Index, Dallas Fed, others…

Housing Sector

• Housing is 15% of GDP.
• Both as part of construction (Investment)
• Economic activity from retail services (Consumption)

Housing – Key Indicators:

• New Home Sales,
• Existing Home Sales
• Pending Home Sales
• S&P/Case Shiller 20-City House Price Index
• Mortgage Lending Figures

Housing Sales

• Annualized number of new home sales and existing home sales.
• Near the end of the month, data for June released in July. Some significant lag.
• Most Recent Release came out on Feb. 24th : 284K, was 329K in December

Housing sales provide a gauge of not only the demand for housing, but the economic momentum.

People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as new home sales, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase.

The economic “ripple effect” can be substantial especially when you think a hundred thousand new households around the country are doing this every month. Since the economic backdrop is the most pervasive influence on financial markets, new home sales have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the new home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.

Pending Home Sales

• Acts as a leading indicator,  a pending sale is one in which a contract was signed, but not yet closed.
• It usually takes four to six weeks to close a contracted sale. –Just had January’s release (end of Feb).

Construction – Key Indicators

• New Home Sales, already looked at, market for new homes.
• Construction Spending
• Housing Starts/Building Permits
• –NAHB Housing Market Index

Trade

• Trade Deficit in 2010 was -$497.8B
• Imports = $2,329.7 billion
• Exports = $1,831.8 billion
• Trade Balance in Dec. = -$40.6 billion

Inventories – Key Indicators

• Business Inventories
  - Business inventories are the dollar amount of inventories held by manufacturers, wholesalers, and retailers.
• Wholesale Inventories
• ISM Manufacturing Index
• Fed Regional Manufacturing surveys

What are inventories? Why are they important?

Inventories can be considered a part of a group of leading indicators of business cycles. By leading indicator, we mean that changes in a variable such as business inventories can lead to changes in the future condition of the economy. To explain the linkage between changes in the level of business inventories in many economic sectors and economic growth, let us consider two cases: an undesired accumulation of inventory, and an undesired decrease in business inventories. We will look at the economy as a whole.

• The economic impact of an undesired accumulation or increase in business inventories. Businesses plan ahead and forecast future sales. Based on their expectations, they stockpile inventories of goods the expect to sell in the near future. The reason is simple. Businesses want the goods available to meet customer demands or else they will lose the sale, and most likely lose it to a competitor. If there is a slowdown in consumption in many economic sectors, then many businesses will not sell as many goods as they had planned to. As a result, businesses will not sell off their inventories of goods as they had planned and inventories will accumulate.When inventories accumulate due to a decrease in consumption, businesses respond by reducing orders of goods from producers. In turn, as producers face a cutback in demand for their goods, they will decrease output. When inventories are accumulating in many sectors of the economy, reductions in the production of goods becomes widespread, and as firms reduce their output, many workers are laid off. As payrolls are reduced, the number of unemployed swells and the unemployment rate rises. With the reduction in output, GDP growth falls and if the drop in production is sharp enough, the economy goes into a recession.
• The opposite occurs with an undesired or unanticipated decrease in inventories. If demand for goods are greater than businesses had forecast, inventories will be rapidly depleted. As firms restock their inventories and adjust for a higher level of sales, they increase their production. Increases in output requires firms to employ more workers. If this is occurring throughout the economy, the unemployment rate will fall as more individuals find jobs and economic output will increase. This leads to a jump in economic growth as measured by GDP.The surge in demand for goods and services as well as the responding hike in production and employment comes at a possible cost. As more jobs are created, incomes rise, further contributing to an increase in the demand for goods and services. The potential result is a rise in the inflation rate due to demand-pull effects. Demand-pull inflation results from price pressures caused by rising demand for a good. In addition, cost-push pressures may also lead to greater inflation. As firms increase their output and demand for labor, wages may rise, especially if the economy was already near or at full-employment. Higher wages increase production costs that may be passed on to the consumer in the form of higher prices for goods.

The important point made here is that although inventories are a relatively minor component of GDP, rapid changes from their desired levels can have important economic consequences. When inventories accumulate beyond desired levels, an economic slowdown may be on the horizon as producers reduce their output. Or if inventories are rapidly being depleted, then economic growth and possibly inflation may soon rise as wage and price pressures build. Economic analysts monitor the divergence of inventories from desired levels as a leading indicator of potential changes in future economic growth rates.