Data Show Improvement

Overall, I would agree with the general consensus that the economy has seen its worst days. However, this simply means that the rate of deceleration has improved, in that it is slower. Many data points are showing an uptrend from extremely low levels but remain in negative territory. Equities and treasury yields have rightly soared as a result, but they may be over-extended. The risk is that the economy stabilizes but does not grow appreciably, meaning we stagnate, similar to how Japan has done for the past 15 years. If this occurs, if corporate profits disappoint raised expectations, the stock market will retrace some of this rally and bonds will rise. Looking at the economic data in isolation, the economy does appear to be stabilizing, the question is whether there will be any significant growth. This remains to be seen.

05/05: The ISM Non-Manufacturing (Services) Index rose to 43.7 in April from 40.8 the month before. This mirrors the improvement in the ISM manufacturing index and, again, bodes well for the overall economy. New orders soared to 47 from 38.8. The employment index rose to 37 from 32.3. New export orders soared to 48.5 from 39.

The ISM Non-Manufacturing (Services) Index is a survey of purchasing managers in the service sector of the economy and is a barometer of business conditions in that sector, which comprises 90% of the economy. For this reason, it is a significant indicator but being that it is relatively new, having begun in July of 1997, the ISM manufacturing index is more closely watched and has a greater effect on the market.

05/04: Pending sales of existing homes rose 3.2% in March, following a 2% increase the month before. It was expected to be unchanged. This was the first back-to-back gain in almost a year. Purchases rose in the South and West, but fell in the Northeast and Midwest. Distressed properties (foreclosures) accounted for 50% of all existing home sales in March. Pending home resales are considered a leading indicator because they track contract signings, whereas the existing home sales data tracks closings which normally occur a month or two later. However, pending sales are also subject to cancellation, so that the figure may be overstated. The index started in 2001.

The National Association of Realtor’s Affordability index, which tracks mortgages rates, home prices, and incomes,  jumped to its highest level since records began in 1970.

05/02: Factory orders for March fell 0.9%, following a 0.7% increase the month before, which was also revised down from a 1.8% gain. A decline of 0.6% had been expected. Factory orders continue to plummet downwards on a year-over-year basis, but with the ISM orders data showing signs of a rebound, I do not expect orders to continue the downward trend much longer. “There is a slowing in the pace of contraction in the manufacturing sector,” according to Steven Wood of Insight Economics.

Although durable goods data accounts for 50% of all factory orders and are released a week earlier, they tend to be volatile. Factory orders are less subject to revision and are therefore more reliable. Take note of the capital goods orders excluding defense in particular, as these are a leading indicator of business capital spending on equipment. These rose 0.4% in March.

05/01: The ISM Manufacturing Index rose to 40.1 in April from 36.3 the month before and was slightly higher than expected: 38.4. The ISM index is still well below 50, indicating continued recession but has recently rebounded from a low of 32.9 in December last and is trending higher. This new uptrend is even better reflected in the underlying components. These are tentative signs that the worst is indeed over. The new orders component rose to 47.2 from 41.2, the highest level since August last and above the 45 level indicating recession, but below the 50 level still indicating contraction. Exports rose to 44 from 39. The increase in the production gauge also signals that manufacturing sector is improving and that companies have worked off their inventories. The inventories index rose to 33.6 from 32.2. The employment index also rose to 34.4 from 28.1. Overall, this is a positive signal for the economy as a whole if this trend continues.

The ISM Manufacturing Index is arguably the most significant economic data of all. This is a survey of purchasing managers in the manufacturing sector and is a barometer of business conditions in that sector, which comprises 10% of the economy. A reading above 50% typically implies that the manufacturing sector of the economy expanded during the month; a reading below that level suggests industrial contraction. Readings below 45% are normally required to be consistent with recession, however, because growth in service sector output can stabilize the overall economy when manufacturing weakness is only moderate. The ISM index is 'the' key leading indicator of factory orders and industrial production, and is the reason why these figures have little effect on the market. The Federal Reserve is known to give the index great weight.

ISM New Orders is the biggest and most important component of the ISM Manufacturing Index. It is reflects the level of new orders received by businesses and is an extremely strong indicator of future prospects in the sector and the economy overall. Its impact on the market is a considerable part of the overall index’s effect.

05/01: The University of Michigan’s index of consumer sentiment rose 65.1 in April, its biggest increase in more than 2 years,  from 57.3 the month before. This was higher than the 61.9 forecast. A record low of 55.3 was reached in November. Consumers are becoming less risk averse thanks to the resurgent stock market and persistently lower gas prices. The consumer expectations index for prospects 6 months from now, which more closely predicts the direction of consumer spending, rose to 63.1 from 53.5 the prior month.

The Michigan Consumer Sentiment Index uses telephone surveys of around 500 people across the United States to gather information on consumer expectations regarding the overall economy. The preliminary report, which includes about 60% of total survey results, is released around the 10th of each month. A final report for the prior month is released on the first of the month. The index is becoming more and more useful for investors because it gives a snapshot of whether consumers feel like spending money.

04/30: Initial jobless claims data is indeed improving, as I suggested last week. New claims were lower than expected at 631k, down from 645k the week before. The 4-week moving average of initial claims, a less volatile measure, fell for the second week in a row to 625k from 637k, and may show that the rate of increase in jobless claims has peaked. Job losses look like they have peaked with the 13-week or 3 month average up 78% compared to a year ago, but down from the 81% rate of increase 2 weeks ago. “These are tentative signs that the pace of layoffs have slowed,” said Steven Wood of Insight Economics.

Weekly initial jobless claims data show the amount of people who have been fired in the past week and put in claims for unemployment benefit. This is a good representation of the current state of the labor market, a major factor in consumer spending plans.

04/29: Gross Domestic Product (GDP) shrank 6.1% last quarter, much worse than expected. However, even though the headline figure was negative, some of the components provided encouraging signs. Consumer spending rose 2.2%, following a decline in Q4. Inventories fell substantially. Although this detracts from the overall GDP in Q1, it increases the likelihood that businesses now have lean inventories and that stocks will not fall any further. All-in-all, the perception was that this may the worst quarter of the year and that although GDP will continue to fall, it will be at a slower pace, signaling that we’re on the road to recovery.

GDP is the principal measure of the economic growth. It measures the total amount of goods and services produced domestically in the United States and encompasses consumer spending, business investment, housing investment, government spending, and foreign trade. Consumer spending comprises about two-thirds of the total.

04/28: Consumer Confidence jumped in April by the most since 2005. It rose to a 5-month high of 39.2, well higher than the expected 29.7, and up from 26 in March. The expectations index for the next 6 months rose to its highest level since the Lehman collapse, to 49.5 from 30.2. “Consumers believe the economy is nearing a bottom,” said Lynn Franco of the Conference Board.

Consumer confidence is considered a key determinant of consumers' future spending plans but it’s not what people say that matters, but what they do. Retail Sales is much more accurate reflection of consumer behavior. Focus on the more closely watched "expectations" component, which gauges consumers expectations for the economy over the next six months,

The data is compiled by the Conference Board from a monthly survey of approximately 5,000 households. Respondents are first asked about their perceptions of national economic conditions, and subsequently, they are queried about their personal circumstances and buying plans for new homes and various durable items.

The University of Michigan’s survey of consumer sentiment is considered to be a better leading indicator but given its small sample size, it only polls 500 to 600 people, it is best used in conjunction with the more robust Conference Board survey.

04/24: New homes sales fell in March, decreasing 0.6% from February, but were still 31% below a year ago. The median price fell 12%, down but better than the 18% decline reported a month ago. Foreclosure of existing properties continue to be responsible for the drop in new home prices as they are comparably more affordable. More importantly, inventories decreased, with the supply of new homes at the current sales rate falling to a 10.7 months from 11.2 in February and a high of 12.5 in January. A figure of 5 to 6 months of supply is consistent with a stable market. The deterioration in housing is still not over, but this is mildly encouraging and is consistent with the belief that the worst is over for housing. “There’s a bottoming out process going on here,” said John Silvia of Wachovia.

New home sales is an important indicator of conditions in the housing sector because although new homes comprise less than 10% of all home sales, the sales are recorded when a contract is signed and are considered a leading indicator of the housing data. Existing home sales are based on closings and therefore reflect contracts that were signed weeks or months earlier. The significance of new homes sales data is undermined somewhat by its volatility.

04/24: Durable goods orders fell less than expected in March, down 0.8%, following a 1.6% increase the prior month. Expectations were for a 1.5% decline in March. Orders excluding transportation and defense rose 0.4% after rising 4.1% the month before. These figures may be nearing a bottom, in line with the recently improved ISM order index, which is a better leading indicator and bodes well for manufacturing and the economy at large going forward.

Durable goods orders are notoriously volatile but a key leading indicator of factory orders. The number of orders excluding transportation and defense (capital goods orders) is a also key leading economic indicator, as it shows whether the level of business investment is rising or falling.

Peak in Jobless?