The VCM Investment Committee is made up of nine of our team members. We meet quarterly, or more often if we feel the markets and economy require additional research and analysis for our clients. As a team we evaluate various economic indicators each month as stats and reports are released by various federal organizations and bureaus. This is a short synopsis of the indicators we watch, and why.
Gross Domestic Product (“GDP”) – this is the total monetary or market value of all the finished goods and services produced within a country’s borders during a specific time period. The U.S. releases estimates of our country’s GDP on a fiscal quarterly basis, and issues a final report after the fiscal year for the year prior.1 Why we watch it: This is a traditional indicator of the strength of the U.S. economy; we monitor these reports and discuss them as a committee to tailor our advice and educational pieces to be as up to date as possible.
Housing Permits – The U.S. Census Bureau collects and reports on new housing permits. Per its website, “[t]he purpose of the Building Permits Survey (BPS) is to provide national, state, and local statistics on new privately-owned residential construction. Data is available monthly, year-to-date, and annually at the national, state, selected metropolitan area, county and place levels.”2 Why we watch it: When this data shows a drop in new housing permits, it can indicate a weakening economy due to a variety of factors. We balance this data with other indicators to determine where we think the economy is heading in the near and long term.
Jobless Claims – The U.S. Department of Labor analyzes data submitted by states related to initial jobless claims (individual first time requests), continued jobless claims (individuals still claiming unemployment), and unemployment insurance covered claims. This data is reported as-is and seasonally adjusted due to natural fluctuations in labor requirements nationwide.3 Why we watch it: You probably hear a lot about this report in the news whenever new data is released. A strong or weak labor market is not a sole indicator of the strength of the economy – in our opinion, it must be paired with other data to best analyze and opine on the future of the economy.
Consumer Sentiment – The University of Michigan conducts “surveys on random samples of US households. The index aids in measuring consumer sentiments in personal finances, business conditions, among other topics. Historically, the index displays pessimism in consumers’ confidence during recessionary periods, and increased consumer confidence in expansionary periods.”4 Why we watch it: We like to know how consumers feel about the overall economy, and specific factors that affect their daily lives. This indicator, paired with others, helps us build a consensus around where we see the economy going.
Retails Sales – The U.S. Department of Commerce collects and reports on retail sales. “Retail sales is an important indicator that signals either the contraction or expansion of an economy. An increase in retail sales signals a healthy economy that is expanding while a decrease in retail sales signals the opposite. An increase in retail sales usually moves stocks upward and is good for shareholders.” 5 Why we watch it: This data can change seasonally, and sometimes can shift the markets if reality doesn’t match expectations. We monitor these reports as a committee and discuss them during our quarterly meetings.
Consumer Price Index (“CPI”) – This data is collected, analyzed, and reported on by the U.S. Bureau of Labor Statistics. The CPI “is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.” Additional data for select utility, automotive fuel, and food items are also available, but are not included in the core CPI reports.6 Why we watch it: You’ve probably also heard quite a bit about this economic indicator over the last two years. Inflation is a part of everyday life, but sometimes it’s not as in your face (or your wallet) as it is today. We interpret this data along with reports on consumer sentiment, retail sales, wage growth, and jobless claims to build a better understanding of the state of the economy and the direction we believe inflation will take in the future.
Wage Growth – The Atlanta Federal Reserve is tasked with collecting and organizing data related to wage growth. This report “is constructed using microdata from the Current Population Survey (CPS), and is the median percent change in the hourly wage of individuals observed 12 months apart.”7 Why we watch it: When jobless claims are low and wage growth is high, in may indicate a strong economy, a headwind to reducing inflation, and a resilient workforce. The IC believes the data must be interpreted with other indicators in order to see the full picture of the health of the economy.
Commodities – “Commodities are raw materials used to create the products consumers buy, from food to furniture to gasoline or petrol. Commodities include agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver and aluminum. There are also “soft” commodities, or those that cannot be stored for long periods of time, which include sugar, cotton, cocoa and coffee.” There is a common belief that changes in commodities prices are early indicators of increased or decreased inflation; commodities tend to also respond quickly to unique and sudden shocks in the domestic and global economy.8 Why we watch it: Since commodities are the raw materials used to create consumer products, we use changes in specific commodity prices to estimate possible effects in retails sales and with inflation.
ISM New Orders – The Institute of Supply Management collects voluntary reports from purchasing officers and departments across the U.S.A. and reports on new orders from customers of manufacturing firms. “A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining.”9 Why we watch it: While this data may seem arcane to most of us, it’s a great indicator of how healthy the manufacturing industry is as a whole, which in turn affects the health of the overall economy.
Profit Margins – The Bureau of Economic Analysis, part of the U.S. Department of Commerce, compiles and reports on estimated corporate profits. Per their website, “[c]orporate profits is one of the most closely watched U.S. economic indicators. Profitability provides a summary measure of corporate financial health and thus serves as an essential indicator of economic performance. Profits are a source of retained earnings, providing much of the funding for capital investments that raise productive capacity. The estimates of profits and of related measures may also be used to evaluate the effects on corporations of changes in policy or in economic conditions.”10 Why we watch it: We don’t just watch corporate profits for stocks in the Verde 10, Verde 5, or the Verde Trio, we watch these reports to analyze how companies of all sizes are doing across the country. This can help us determine which assets to watch closely in the future, and help us diagnose how well the economy is doing.
Truck Shipments – “The Bureau of Transportation Statistics’ (BTS’) Transportation Services Index (TSI) measures the volume of freight and passenger transportation services moved monthly by the for-hire transportation sector in the United States. BTS produces three indexes: a freight index, a passenger index, and a combined index. The indexes incorporate monthly data from multiple for-hire transportation modes. Changes in the Transportation Services Index (TSI) reflect changes in the demand for goods and services.”11 Why we watch it: When freight and passenger transportation slows, it can indicate a lower demand for consumer goods and a move away from discretionary spending. This helps us determine if consumers are concerned about a possible recession, job loss, or other negative situations in the future.
Money Supply – “The money supply is the sum total of all of the currency and other liquid assets in a country’s economy on the date measured. The money supply includes all cash in circulation and all bank deposits that the account holder can easily convert to cash… [some] view the money supply as the main driver of demand in an economy, believe that increasing the money supply leads to inflation.”13 Why we watch it: This became a closely watched and often commented on economic indicator during the Covid-19 Pandemic when the federal government injected billions of dollars into the U.S. economy with PPP Loans for businesses and checks to individuals. Some experts believe this is partly to blame for the high and persistent inflationary environment we currently find ourselves in. A tighter monetary policy managed by The Federal Reserve is one tool use to help fight inflation.
Yield Curve – “The term yield curve refers to the yields of U.S. Treasury bills, notes, and bonds in order from shortest to longest maturity date. The yield curve describes the shapes of the term structures of interest rates and their respective terms to maturity in years.”14 Why we watch it: This economic indicator is usually hyped up in the news as an indicator of a future recession. While the talking heads in the news may leverage this for headlines, many in the industry realize this data is helpful when balanced with other data, but is not a litmus test for whether a recession will take place in X number of months.
- Investopedia; Gross Domestic Product (GDP): Formula and How to Use It; Jason Fernando, March 30, 2023.
- U.S. Census Bureau as of May 3, 2023; Link.
- U.S. Department of Labor News Release of April 22, 2023. Link.
- University of Michigan: Consumer Sentiment data per the St. Louis Federal Reserve as of May 2, 2023. Link. yCharts U.S. Index of Consumer Sentiment as of May 2, 2023. Link.
- Investopedia; Retail Sales: Definition, Measurement as an Economic Indicator; Will Kenton, April 19, 2023.
- U.S. Department of Labor Statistics as of May 3, 2023; Link.
- Federal Reserve Bank of Atlanta – Wage Growth Tracker as of May 3, 2023; Link.
- Understanding Commodities; PIMCO as of May 3, 2023. Investopedia; The Correlation of Commodities to Inflation; Trevir I. Nath, August 1, 2022.
- Trading Economics; United States ISM Manufacturing New Orders; as of May 3, 2023.
- U.S. Bureau of Economic Analysis as of May 3, 2023. Link.
- The Bureau of Transportation Statistics as of May 3, 2023. Link.
- Seeking Alpha; Are Credit Spreads Still a Leading Indicator for the Stock Market?; Pater Tenebrarum; October 15, 2018.
- Investopedia; Money Supply Definition: Types and How It Affects the Economy; The Investopedia Team; February 12, 2023.
- Investopedia; The Predictive Powers of the Bond Yield Curve; Troy Segal; June 29, 2023. The Federal Reserve Board – Yield Curve Models & Data as of May 3, 2023. Link.
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