The most important indicator relating to consumers' wellbeing is the monthly report on employment. Strong growth in employment implies the economy is strong, consumers are making money, and they are willing to spend. A decline in employment growth means that consumers will spend less due to slower growth in income, and they will be more cautious.
What is strong growth in employment? In order to assess the strength of an indicator, one has to keep in mind that the overall long-term growth of the economy is close to 2.5% to 3%, depending on what period you choose and how you measure the long-term growth. If employment grows .1% month to month, this is very slow growth, because if you multiply times 12 to get an annual rate (this is a very rough approximation), you would get 1.2% growth in employment, which is well below the 2.5% overall long-term growth, and this tells you that business is growing very slowly.
On the other hand, if employment grows .5% month to month, a rough estimated of the annualized growth rate is close to 6% which is obtained by multiplying .5% by 12. Six percent is a very strong growth rate and reflects a very strong economy. The employment numbers are available in the early part of the month for the preceding month from the Bureau of Labor Statistics.
Another number released with the employment figures is the unemployment rate. If the unemployment rate declines, the economy is very strong; there are more people being employed than supplied by the labor force. This is a sign the economy is very strong and is creating jobs faster than there are people made available in the labor force.
When the unemployment rate stabilizes at a low level, it means that labor becomes tight and the economy is expanding at close to full capacity. Wages start rising faster and Wall Street becomes concerned about the risks of higher inflation. When the unemployment rate increases, the economy is slowing down, employment growth is slower than the growth of the labor force and the odds favor the economy to begin to grow at a below-average pace.
The Help wanted advertising index measures the demand for labor. It is an important indicator because when this indicator declines, business has decided to hire fewer people and employment in the future is likely to grow at a slower pace. The importance of this indicator is that it tends to lead trends in unemployment. This indicator is available from The Wall Street Journal or Barron's.
Retail sales is also information available monthly and represents how much consumers are buying at retail stores. Strong retail sales reflect strong employment growth, a strong economy, and strong income. It is a measure that is used to confirm the strength of the overall economy. Retail sales data are released by the Census. There are several surveys measuring consumer attitudes and the Conference Board makes available an index of consumer confidence. The University of Michigan makes available a survey called consumer sentiment. These surveys are the result of questions presented to a select sample group of consumers regarding how they feel about the overall economy, what their attitudes are towards purchasing goods, towards purchasing autos, about the future of the economy, the future of inflation, and their income. The answers are ranked and an index reflecting consumer sentiment is computed.
When the University of Michigan's Index of consumer sentiment is close to 100, consumers are very positive about the economy and its outlook, and they are willing to spend. A high consumer sentiment means that the economy will stay strong, retail sales will be strong, and employment will be strong.
However, when the consumer sentiment declines, the economy will slow down because of the importance of consumer spending on the overall business cycle. One has to watch consumer sentiment very closely, especially when it declines close to 80-90; the odds are that a recession or a period of very slow growth is imminent or actually underway.
Another indicator related to consumer wellbeing is consumer installment credit. This figure reflects the amount of money borrowed on installment credit and is released by the Federal Reserve. It is an important indicator on the finances of consumers and how capable they are in spending.
Strong growth in consumer installment credit indicates that consumers are willing to borrow more because they feel comfortable about the future, and therefore, the economy will be stronger. During such times it is not unusual for interest rates to rise. Slower growth in consumer credit is the result of higher interest rates and an economy that is slowing down.
Closely related to all these data, and probably one of the most important ones, is personal income. Income is closely related to employment, retail sales, and consumer confidence. Strong growth in personal income suggests that consumers are feeling good about the future, employment is strong, and retail sales are robust. The growth in personal income closely mirrors the growth of the overall economy or GDP.
More liquidity in the system, declining inflation and interest rates, create the necessary conditions for people to buy and business to invest and expand production. As the economy strengthens, employment increases and the increase in employment is accompanied by an increase in income. The increase in income, of course, encourages consumers to spend, and therefore, retail sales tend to rise.
A slowdown in personal income is usually a sign that things are cooling off, and is reflected in lower growth in employment and lower retail sales. A slowdown in the economy which is usually anticipated by rising inflation and rising interest rates and some tightening from the central bank, causes business to become more cautious about their outlook and about their production plans. By reducing employment to keep costs under control, personal income slows down. Because of the slowdown in personal income, consumers tend to be more cautious about their spending, resulting in slower retail sales. The monthly data on personal income is available from the Bureau of Economic Analysis.
An indicator that is widely followed because it is made available weekly by the Bureau of Labor Statistics is the average weekly initial claims for unemployment insurance, which measures the number of people applying for unemployment insurance. When this index increases, it is a sign that the economy is slowing down. When the number of people applying for unemployment insurance declines, the economy is strengthening because there are more and more people finding jobs.
One way of assessing the strength of the economy is to examine the level of initial claims. If the level is very low by historical standards, the economy is very strong, employment is growing very rapidly, and economic conditions are great. When the initial unemployment claims are high, the economy is slow and many people are applying for unemployment claims, so business activity is very weak. Not only is the trend important for this indicator, but also the levels.
The strength of the economy can be determined by the level of unemployment claims. If unemployment claims decline and reach a level close to 300,000, the economy is strengthening and is very strong. A level of around 300,000 also means that the labor market is very tight and the economy is very strong. Therefore, conditions are what analysts call “overheated”. Under these conditions investors should expect wages to be rising faster. An increase in unemployment claims suggests that the economy is slowing down and the higher unemployment claims go above 300,000, the more the economy is weakening and the labor market is not as tight. Under these conditions investors should expect wages to begin to slow down. This indicator is available from the Bureau of Labor Statistics.
A strong economy is reflected by a group of trends that are unmistakable:
• Employment growth is strong, close to 2-3%.
• Help-wanted advertising is increasing as labor demand also increases.
• Retail sales grow rapidly, above 4 - 5%, year on year, reflecting strong consumer confidence, which is usually at levels well above 90 or 100, using the University of Michigan consumer sentiment measure.
• Consumer installment credit is also rising rapidly, reflecting high consumer confidence in future income, and therefore, an increased level of borrowing activity.
Because of a strong economy and strong employment growth, personal income is increasing and initial unemployment claims decline.
A slowdown of the economy can be recognized when:
• Employment growth begins to slow down below 2 or 3%.
• Help-wanted advertising declines, a sign that business will be hiring fewer people.
• Retail sales slow down, confirming that employment is weakening.
• The index of consumer sentiment declines, measuring the fact that people don’t feel as confident about the future because of slower growth in employment and in income.
Consumer installment credit also tends to slow down as people borrow less because they see uncertainty in the future and in their income growth. This, of course, is the result of weakening economic conditions and lower unemployment figures. This situation is also reflected by initial claims steadily rising.
(From my book Profiting in Bull or Bear Markets. Published also in Mandarin and on sale in China).
George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager
Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
Shouldn't you too subscribe to The Peter Dag Portfolio?
1 comment:
Post a Comment