Economics
13. Business Sector
Advance report on durable goods (monthly %).
Manufacturing (monthly %).
Manufacturing and trade (monthly %).
Table 2.1, at the end of this chapter, illustrates a typical month's most important economic releases in calendar format. The following are the most important (to the financial markets) indicators.
Automobile Sales
U.S. automobile manufacturers release data on car and light truck sales three times a month: the first 10 days, the middle 10 days, and the final 10 days (although this last release can range between 8 or 9 days in February to 11 days in the 31-day months). This release is measured as an annual rate
representing the retail unit sales (millions) of new passenger cars. Domestic and foreign are each stated separately.
Manufacturer's Shipments, Inventories, and New Orders for Consumer Goods
This is the volume of new orders, in addition to the amount in inventories and shipments received by manufacturers of consumer goods. This indicator is representative of the business sector of the
economy. It is measured as a monthly rate in percentage terms and serves the 30-day period ending two months earlier (i.e., first week in July report is for May period). The lag of this indicator is its major weakness; furthermore, it is released about two weeks after that month's Index of Industrial Production.
National Association of Purchasing Managers (NAPM) Report on Business
NAPM has more than 40,000 members in the United States and Puerto Rico. This report has been issued by NAPM since 1931 (except during World War II). NAPM is our first complete assessment of manufacturing, a sector that is strongly correlated to the total economy. Over 300 industrial purchasing executives serving 21 industries in 50 states are represented on the Membership of the Business Survey Committee. The Committee is diversified by Standard Industrial Classification (SIC) category, based on each industry's contribution to gross domestic product (GDP). These executives must respond to the following areas:
• Inventories.
• Vendor performance/supplier deliveries.
• Employment.
• New orders, backlog of orders, new export orders.
• Imports.
• Production.
• Prices paid index.
NAPM is measured through a questionnaire that purchasing executives respond to by indicating either Up, Down, or Unchanged for each area in the preceding list. The report is calibrated in percentage terms: Above 44.5% indicates an expanding manufacturing sector and below 44.5% a contracting sector. The resulting single index number is then seasonally adjusted to allow for the effects of repetitive intrayear variations resulting primarily from normal differences in weather conditions, institutional arrangements, and differences attributable to holidays. All seasonal adjustment factors are
supplied by the U.S. Department of Commerce and are subject annually to relatively minor changes when conditions warrant them.
The Employment Situation
This economic release covers the change in nonfarm payroll employment. In addition, the
unemployment rate is stated (annual percentage rate of civilians who have filed for unemployment compensation) as well as the Employment Cost Index (average hourly earnings). This crucial report is broken down into two separate surveys: an establishment survey and a household survey. The
establishment (industry) survey looks at the payroll employment (hours, wages, and overtime) of the following industries: goods producing, manufacturing, construction, mining, service producing, transportation, public utilities, wholesale trade, finance, insurance, and real estate.
The household survey, on the other hand, dutifully queries 59,500 households (although I know no one who has ever received such a call) on the status of employment. The first question—''Do you have a job?"—is used as an estimate of the labor force figure (or in other words, the base against which the unemployment rate is measured). The status of job seeking is determined by asking, "Are you looking for a job?" The answer to this question is used to establish the unemployment rate.
The employment situation indicator is measured in thousands of newly employed; the total amount and the manufacturing-only amount are both stated. It is released by the Labor Department at 8:30 A.M., EST on the first Friday of each month and covers the previous month.
On each Thursday at 8:30 A.M. (EST), the Department of Labor reports the number of new unemployment claims for the previous week. The "rolling nature" of this report allows the
unemployment situation for the month to be estimated very accurately, and any aberrations to this widely expected reading on employment may disturb the markets. As stated earlier, it is not the
release that can be disturbing, but rather the amount of change compared with the consensus forecast.
And forecasts for employment situation releases are anticipated to be more accurate than other releases.
The Index of Leading Economic Indicators
In the first week of each month (actually the last business day of the previous month) the Conference Board (a not-for-profit economic research concern with more than 2700 corporate and other members in 60 nations)
releases the Index of Leading Economic Indicators (LEI). Up until early 1996, the U.S. Department of Commerce had taken the responsibility for reporting this important composite indicator. The underlying premise of this release is its strong correlation with the future direction of the economy.
The design of the LEI allows it to serve as a barometer of the future direction of the economy. The LEI is actually a composite of 11 separate indicators, each of which is separately reported throughout the month. In this way, government economists hope to create one indicator that forecasts the future direction of the economy with a good amount of accuracy.
Has it worked? The jury is still out, but this index has been reliable in predicting down-turns in the economy 8 to 18 months in advance; however, it has also rung a false alarm about once each cycle. In the Fall 1984 period, the LEI suggested a weaker than expected rate of growth in 1985, despite
professional forecasts of a strong economic expansion. As it turned out, the LEI beat the forecasters for 1985—a year of subpar growth.
Most of the components that make up the LEI are what you would expect from a release that tries to forecast the future:
• Contracts and orders for plant and equipment. As orders for new equipment increase, the future would appear bright. A typical owner of a manufacturing plant is certainly not going to buy new equipment unless he expects a strong level of growth well into the future. This same premise can be extrapolated, in a more basic sense, to your own situation. Would you feel comfortable putting an extension onto your home when your business is not growing? Or when there have been layoffs in your division at the office?
• Permits issued for new housing, formation of new businesses, and manufacturer's new orders.
When the number of permits issued for new housing is on the decline for several consecutive months, an investor could make the supposition that either we are approaching a recession or, more likely, are already in one. The housing sector has a great impact on the total economy, from interest rates to related industries (furniture, landscaping, remodeling, etc.), due to its relative high correlation with the consumer, whose purchasing habits typically account for more than 66% of GDP. The formation of new businesses acts like a proxy measure of the level of optimism about the future and the
willingness of investors and businesses to invest and spend. As more businesses come into the economy, not only does the level of the economy grow but the
comfort level of many investors also grows. This will snowball into greater consumption and investment.
The basic principle of the LEI is that changes in the business cycle can be a guide to the future direction of the economy, and its forwardlooking nature guarantees close attention from Wall Street.
The LEI is measured on a monthly rate in percentage terms for the time period of the previous month (i.e., in late July the report comes out for June); this remains one of its major criticisms.
The LEI is a composite of 11 different indicators:
1. Average workweek of production workers in manufacturing. Due to the uncertainty