Personal Wealth Management / Economics


Time is precious—and limited. Here are some pointers on how to allocate your time in analyzing economic data.

We only have so much sand in the hourglass.
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From government agencies to pollsters and private think tanks, data abound. Sizing up that data is a core aspect of understanding recent economic and market trends. But wading through it all is a daunting task, further complicated by the fact not all data carry an equal market impact. Hence, as an investor, time is precious and knowing where to allocate that time is a critical skill. Proper filtering not only saves you from a time-sucking chore, but may also improve investment decisions—win-win! So in the spirit of helping you win back some valuable time, here are some widely covered datasets we believe shouldn’t consume too much of your attention.

First a quick note: None of what follows is to argue you should ignore these factors in forming an assessment of the economy. Rather, we’d suggest making note of them, but only allocating them significant time if there is something very unusual—a random spike or fall out of step with the recent trend. Also, if you are analyzing individual securities or sectors, some of these may be more (or even less!) important.

The Producer Price Index: PPI supposedly tracks how costs are passed from one stage of production to the next, giving an early glimpse into corporate profit margins and consumer price inflation. Thing is, inflation is always and everywhere a monetary phenomenon—it’s prices increasing broadly across the economy. PPI is really only likely to manifest in higher consumer prices in areas in which producers have pricing power. Therefore, cost-push inflation is a misnomer. How much money chases goods and services drives inflation, not what upstream vendors charge each other. For this reason, if inflation is what you are trying to monitor, then you are better served watching money supply measures, like the US M4 published by the Center for Financial Stability or perhaps loan growth data from the Fed. Now, there may be some influence on profit margins from producers’ costs rising, but using PPI as a proxy isn’t going to yield much insight.

Wholesale Trade and Inventories: Wholesale trade is another look at business-to-business activity that presumably offers some special insight into consumer trends. But how much business are selling to one another and the inventories they are stocking, plus their relationship—the inventory-to-sales ratio—are open to interpretation. Are businesses stockpiling because they anticipate a demand surge or because they misjudged one in the recent past? Aggregated together and without context, it’s impossible to tell.

Jobless Claims: The Department of Labor reports weekly initial unemployment insurance claims every Thursday and some use it as a timely economic gauge—often looking at the four-week moving average’s trend—for clues on the economy’s direction. It’s even included in The Conference Board’s Leading Economic Index! However, like other employment measures, it lags (as much as we like the LEI overall). Layoffs are a symptom of a weakness, not a cause or leading indicator, so a new trend in jobless claims won’t tell you anything you didn’t already know.

Housing Starts: Housing hogged headlines in the last recession and folks understandably fixated on its relative health. But it’s only 3.5% of GDP, and residential real estate isn’t the huge economic swing factor many believe it to be. After all, the housing bubble popped in 2006. America didn’t enter recession until late 2007 and absent the impact of FAS 157 (the mark-to-market accounting rule) and the government’s haphazard actions, we suspect the macroeconomic picture would have looked very different. Homebuilding stats don’t have much to do with the broad market. They’re important to homebuilders and construction materials firms, but those comprise a sliver of the total stock market.

Existing Home Sales: How houses trade on the secondary market doesn’t affect economic production much and “wealth effects” from rising (or falling) existing home prices has less impact on consumption than many believe. Existing home sales matter to people who are buying and selling a home (and real estate brokers). But overall, they have little connection to corporate earnings.

Regional Purchasing Managers’ Indexes: PMIs are valuable, but we’d suggest not spending too much time with regional gauges. Stocks care less about geography than economic heft. No one region—New York (Empire), Philly, Richmond, Dallas or Kansas City—is any more telling than another. What’s more, regional PMIs only reflect manufacturing—around 12% of US GDP. Sector breakdowns like the Institute for Supply Management provides for manufacturing and non-manufacturing industries are much broader and more useful in this regard.

Consumer Confidence Surveys: Polling people about how they feel may seem fruitful, but it provides little forward-looking insight. People often say one thing and do another. Actual retail sales often contradict the surveys. Consumer surveys hint at overall sentiment, but that’s a coincident indicator at best.

Productivity: “Living standards can’t improve unless productivity rises” is a popular argument these days, and efficiency gains are a powerful long-term driver. But they are impossible to measure with classic productivity statistics, which basically measure output per unit of labor. That isn’t forward-looking—it is a mashup of a backward-looking measure and a late-lagging one. While measured productivity has been historically low this business cycle, profits and profitability have been high. Which do you think stocks pay more attention to?

There are, of course, many more. To size them up on your own requires weighing the methodology, history and logically assessing the connection to markets. Ask: Is this the only—or most complete—measure? Ultimately, if the data you’re sizing up don’t pass that logic test, we’d suggest you may be better served spending the bulk of your time elsewhere.



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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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