It frustrates me when I turn on the news and hear newscasters play up one data point in their newscasts when they talk about the economy, ignoring many other factors. That isn’t fair, and it doesn’t tell the whole story. Some economic data points are negative, there’s no way around it. But others are good and you have to look at a broad range to get the real story of what’s happening with our economy.
This is why today I want to dive deep into 10 economic indicators that, when looked at together, will give a real view of what’s happening in the economy and what it means for the rest of the year.
Now, I’m very bullish about the profit opportunities for stocks in the remainder of the year. Once we get past the Labor Day holiday this weekend, trading volumes will return and investors will realize that earnings growth has been phenomenal and stocks are cheap. But, there are some economic issues that have not yet been worked out that will weigh on the market.
Let’s talk about those negative factors first, so we can see where the trouble areas are and be prepared to deal with each.
1. Consumer Confidence Plunges, Spending Remains High
Monday’s Conference Board index showed that consumer confidence fell swiftly from 59.5 last month to its latest 44.5 reading. This was well below the consensus estimate of 52.0, but keep in mind consensus optimism was up following the pickup in the latest University of Michigan sentiment numbers. According to the Conference Board, expectations dropped 23.0 points to 51.9. Expectations are known to be sensitive to stock prices, so if prices remain close to current levels we should see expectations firm up. In contrast, the report showed that current conditions only slipped 2.4 points for the month.
2. Falling Exports Propel Trade Deficit to 3-Year High
June’s trade deficit figures highlight some of the persistent weaknesses in our economy. The trade deficit ballooned 4.4% from $50.8 billion in May to $53.1 billion in June. This is the largest trade gap since October 2008, and it far outstripped the consensus estimate of $48 billion. The main culprit was that exports, excluding oil and aircraft figures, have fallen 3.2%, reaching their lowest level since January 2009. This was unexpected and unwelcome news. A bigger trade deficit is indicative of slow manufacturing growth and puts downward pressure on GDP growth estimates. However, analysts are expecting a rebound in the July numbers (yet to be released) because overall exports are trending upwards. Fortunately, the dollar is still pretty weak, and industry leaders expect that this will keep demand for American-made goods strong.
3. New Home Sales Continue to Flag
We all know that the real estate market has been weak and that it is going to be a long while before all the problems are sorted out. So be ready to see some steps forward and some steps back taken in the coming years. Recently, we saw a small step back. July’s new home sales dipped 0.7%, to 298,000, the lowest level in five months, according to the Commerce Department. After June’s 300,000 rate, Analysts had expected approximately 310,000 new sales to be logged for the month. It is clear that builders are hesitant to start new projects, due to stiff competition from cheaper, existing homes. And, even with mortgage rates at a record low, lending standards are still tight, so consumers are wary of taking on mortgages. In the long run, there is growth, just not as much as we would like. In the 12 months through July, new home sales rose 6.8%, but economists consider 700K a benchmark of a healthy housing market. The supply of new homes on the market remains flat at 6.6 months’ worth. However, new home sales represent just one-fifth of the housing market, and existing home sales are stronger.
4. Thanks to Verizon Strike, Jobless Claims Rise 5K
Really, what all the bad economic news and sentiment stems from are poor jobs numbers. The economy can’t run like a well-oiled machine with so many people out of work. The most recent numbers showed that jobless claims rose 5,000 to a seasonally adjusted 417K. This was 17,000 higher than economists’ predictions of 400K. The prior week’s figures were revised up to 412K, up from the previously reported 408K. As disconcerting as this news was, there was a special factor affecting claims during the last two weeks: The Verizon (NYSE:VZ) strike added at least 12,500 initial claims to last week’s figures and 8,500 to this week’s. The 4-week moving average has risen 4,000 to 407,500. Thankfully, both sides are engaged in negotiations and the strike is now on hiatus. Analysts say that the current jobless claim rates suggest a slight drop will come in the overall unemployment rate in the next report. Despite this week’s setback, I expect we’ll continue to see fits and starts in unemployment throughout the rest of the year and well through 2012.
So that finishes up the bad news. But, even though it may like it from all the media attention, the economy isn’t just one big, dark storm cloud. There have been several favorable reports that prove certain trends are moving in the right direction. These good reports are often overlooked, but it’s important to remember that the good news is just as important as the bad. That being said let’s move on to the data pointing toward better days ahead.
5. Durable Goods Orders Rebound 4% From June’s Dip, a Small Victory
Durable goods orders climbed more than estimated in July. Durable goods orders jumped 4%, outstripping the consensus forecast of 2.5%. Even excluding the volatile transportation category, orders advanced 0.7%. This is substantially better than last month’s report, where bookings for goods fell 1.3% in June. The rise indicates that manufacturers and automakers have rebounded from the Japanese earthquake. In particular, demand was high for aircraft and automobiles, offsetting a decrease in computers and machinery.
6. Revised GDP Has Messy Headline Growth, But Encouraging Details
After a month of new data, second-quarter Gross Domestic Product was revised to 1%, down from the prior estimate of 1.3%. This was a deeper revision than economists’ expectations; they predicted that output growth would come in at 1.1%. But, the story isn’t completely bleak. There are several conflicting forces acting upon GDP. The downward revisions were mainly caused by a slowdown in business inventories, which increased $40.6 billion instead of the $49.6 billion forecast; excluding inventories, the economy grew at a 1.2% rate. The trade deficit is also throwing things off. Exports grew less than projected, while imports grew more than the forecast. However, the past month has also brought in some positive data, namely in terms of industrial production, retail sales and employment. Consumer and business spending were also significantly higher than expected. Finally, the Commerce Department also noted that after-tax corporate profits rose at the fastest pace in twelve months. Considering the volley of strong corporate earnings growth reported this quarter, I’m not surprised.
7. Consumer Sentiment Index Up from First Reading, Down from July
The good news is that the University of Michigan’s consumer sentiment index rose 2.8% from its mid-August levels of 54.9 to 55.7. This disappointing news is that this figure barely missed expectations of 55.8, and it is still down from 63.7 in July. The usual fears about high unemployment and tepid wage gains are keeping consumer confidence depressed. In the past few months, consumer sentiment has been slammed by the special circumstances of the deficit ceiling negotiations, the S&P downgrade and the European banking crisis. So, even though these are abysmally low numbers, they can only get better in the upcoming weeks and months. The sentiment index was at 63.7 back in July, just before the political theater regarding the deficit ceiling negotiations hurt consumer sentiment, and I expect that once the hubbub about these issues resolves, consumer confidence will be restored to pre-July levels.
8. FOMC Pledges to Keep FFR Low, Stocks Boom
The Federal Open Market Committee (FOMC) met earlier this month to discuss the softening market and how the Fed should respond. From this meeting, the Fed concluded that they would likely keep the federal funds rate (FFR) near zero at least through mid-2013. The FFR has been kept at exceptionally low levels since late-2008 in order to encourage liquidity, and because the Fed can’t let the interest on the federal deficit go significantly higher, the Fed has to keep interest rates low to keep the government afloat. At this moment, the Federal Reserve has not announced another round of Quantitative Easing (QE3), that is, a third round of bond purchases meant to act as a stimulus. But, the Fed basically announced that if investors want higher yields, they won’t get them from Treasury bonds.
This was great news for the market because investors wised up to this fact and turned away from treasuries to high-dividend, blue chip stocks. In addition, because of the low interest rate, companies will be relentless about issuing more bonds and buying their stock back. So, it remains to be seen what effect the Fed’s policy will have on inflation, but the decision to keep interest rates low propped up the market.
9. Jobless Claims Fall to 395K, Lowest in 4 Months
The fear that unemployment is going to soar is not showing up in the raw numbers. Earlier this month jobless claims fell to 395,000, the lowest level since early April! The four-week average, a less volatile figure, is now just 405K. This is exciting news because even in the wake of the debt ceiling debacle, initial claims for unemployment have been trending downward. This sunny outlook was especially weighty when it was released Aug. 11, propelling the Dow ahead 423 points on Thursday. But, we’re not quite out of the water yet; economists consider 375K a benchmark of healthy job growth. As we’ve seen with the Verizon strike since, there’s going to be a lot of push and pull with the weekly jobs numbers.
10. Strong Retail Sales Growth Rounds Ends Roller-Coaster Week
Just over two weeks ago we saw strong retail sales provide a great end to a nerve-wracking week. The Commerce Department reported that retail sales rose 0.5%, the highest in four months! Better yet, they have even revised the May and June figures higher. Now, July overall retail sales were in line with the consensus estimate. But retail sales, excluding auto sales, weighed in at 0.5%, beating the 0.3% growth forecasted by analysts. The real gainers this month were furniture sales (up 0.5%), clothing sales (up 0.5%) and electronics sales (up 1.4%). What is becoming clear is that as food and energy prices start to moderate, it puts more money in consumers’ pockets. And guess what? They go out and spend it! So, consumers are embracing spending more rapidly than consumer sentiment reports suggest.
I know with everything you read or hear about our economy it’s easy to become disheartened and reluctant to invest. However, I hope you at least realize that there’s more to the situation than meets the eye. Unquestionably, we will continue to see some weak economic data roll through that will most likely throw the markets for a loop. But remember the road to recovery is a long one, and even when the economy seems to head in reverse, there are forces working to put it back into drive and toward healthy growth.
