Almost every day a major government agency or private organization releases new information covering the status of some pocket of the economy. I’m here to help you sift through the barrage of economic data out there and determine what this will mean for your stocks.
Building and maintaining knowledge about how economic reports and information pertains to your portfolio decisions can build your confidence in financial decisions.
Consumer Confidence Report
What It Measures: What this report measures is somewhat self-explanatory. Every month, the Conference Board surveys 5,000 households to figure out consumers’ take on current conditions as well as their expectations for the future. The expectations index make up 60% of the total index because it is a better leading indicator than the current conditions index, which makes up the remaining 40%. This survey helps forecast sudden shifts in consumption patterns, but only changes of at leave five points should be considered significant.
The Breakdown: In February, consumer confidence held at 70.2. This is near the highest level in the past 12 months and fell in line with economists’ expectations. What got U.S. consumers excited in February were the improvements on the jobs front as well as unexpected stock-market gains.
The Bottom Line: This measure of consumer confidence has been on a tear since October 2011, when the index bottomed out around 40. The index has also improved by leaps and bounds since the low point of the recession. However, I do expect that the index may start to level off in the coming months due to higher gas prices.
Durable Goods Orders
What It Measures: Orders are a leading indicator of manufacturing activity. So, every month the Census Bureau and the Department of Commerce measure the dollar volume of orders, shipments and unfilled orders of durable goods. Durable goods are those that last at least three years. This report is different from the Factory Orders report, which covers both durable and non-durable goods. Usually, large aircraft and defense orders skew the total number, so it is important to look at the breakdown of the orders. The non defense capital goods figure is a good indication of how manufacturing is doing.
The Breakdown: The Department of Commerce announced last Wednesday that overall durable goods climbed 2.2% in February. This represents a reversal from January’s loss of 3.6%, but still came below economists’ estimates of a 2.8% jump. Excluding transportation, durable goods climbed 1.6%, surpassing the consensus estimate of a 1% gain. Meanwhile, the core capital goods figure climbed 1.2%, also reversing a loss in January. The headline figure was boosted by a jump in aircraft orders.
The Bottom Line: This reversal from January is great news, but not entirely surprising. This time last month, a major tax deduction expired, accounting for the drop in orders. It appears that the economy is stabilizing after that blow. All in all, a good headline reading.
Initial Claims for Unemployment
What It Measures: They are an indicator of the direction of the job market. Increases in jobless claims show slowing job growth; decreases in claims signal accelerating job growth. On a week-to-week basis, jobless claims are volatile, so one of the best ways to track this measure is to look at the four-week moving average. It usually takes a jump or decline of at least 30K claims to signal a meaningful change in job growth.
The Breakdown: Jobless claims continued a downward trend, this time dropping to 359,000. This represents the lowest level in four years, but came in slightly above economists’ estimates that jobless claims would fall all the way to 350,000. The prior week’s jobless claims were upwardly revised to 348,000. The four-week-moving average also declined by 3,500 to 365,000.
The Bottom Line: With a little luck, the steady decline in jobless claims will reflect in this week’s March Unemployment Rate report.
Fourth-Quarter GDP (Third Estimate)
What It Measures: Gross Domestic Product shows the big picture. Annualized quarterly percent changes in GDP reflect the growth rate of total economic output. Of course, this report can move the market up or down, depending on the data. The broad components of GDP are: consumer spending (consumption), investment, net exports, government purchases and inventories. Consumer spending is by far the largest component, totaling roughly two-thirds of GDP. Quarterly GDP reports are broken down into three announcements: advance, preliminary and final. After the final revision, GDP is not revised again until the annual benchmark revisions each July. If you only have time to focus on one economic report, this is it.
The Breakdown: The third and final revised estimate of fourth-quarter GDP showed that economic growth in the U.S. remained at 3%. This matched the previous reading and also fell in line with economists’ estimates. This means that fourth-quarter GDP officially accelerated over the third quarter, when the economy expanded just 1.8%. Last quarter, the largest contributions to economic growth came from gains in inventories, consumption and U.S. exports. Meanwhile, government spending and an increase in imports acted as a drag on GDP.
The Bottom Line: This is a solid reading. Unfortunately, I don’t expect this pace to last. Between rising gasoline prices and inventory gluts, I expect first- and second-quarter GDP to moderate downward a bit.
What It Measures: Personal income measures income, most importantly wages and salaries, from all sources. The report also factors in other sources of income like rental payments, government subsidy payments, interest income and dividend income. This helps to predict future consumer demand, which of course comprises about two-thirds of economic activity. Another important figure in this report is personal consumption expenditures (PCE). PCE covers spending on durables, nondurables and services; these data supplement the retail sales report to get a sense of consumer spending.
The Breakdown: In February, personal income climbed 0.2%. This was in line with January’s gain but came in slightly below economists’ estimates of a 0.3% climb. Disposable personal income also rose 0.2%. Meanwhile, personal spending jumped 0.8%, accelerating from January’s 0.4% gain. Surpassing the 0.6% consensus estimate, this represents the biggest jump in seven months.
The Bottom Line: Although we all would have liked a stronger reading on personal income, the jump in spending indicates that consumers are still willing to open their wallets. This is a big plus for the economy and an encouraging sign for the second quarter.
University of Michigan Consumer Sentiment Index (Final Reading)
What It Measures: The University of Michigan index is almost identical to the Conference Board index, though there are two monthly releases, a preliminary and final reading. Like the Conference Board index, it has two subindices—expectations and current conditions. This index has increased its influence of late on Wall Street and has the ability to move the market up or down. Consumer confidence is hard to nail down, so it is important to keep track of both reports.
The Breakdown: On Friday, the University of Michigan’s final reading for March consumer confidence jumped to 76.2. Because February’s reading was 75.3, this represents the highest reading in a year. This was led by significant gains in consumers’ current expectations. Nonetheless, concerns about inflations caused the consumer expectations component to decline slightly from February.
The Bottom Line: This reading was definitely stronger than the earlier Conference Board report, but the relative strength shown in both reports is encouraging. As I mentioned earlier, consumer confidence could very well level off due to higher gasoline prices, but I am happy with these near-term gains in the meantime.