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Saturday, May 1, 2010

Economic Data Summary: Week Ending April 30th, 2010

This will be the first of my weekly economic data summaries. Understanding the economic trends of the world is very important to making prudent investment decisions and in order to understand the trends, you must know how to read the data.

Because I know readers will have disparate familiarity with various data sets, I will post brief summaries of how the data should be looked at in terms of importance for the next few weeks. Eventually it will only be analysis.

1st Quarter GDP
The releases of Gross Domestic Product are not overly consequential to financial markets for the most part largely because higher frequency data sets (retail sales, home sales, industrial production) come out well before the first reading on GDP. Hence, GDP rarely surprises by wide margins.

So what did GDP tell us this week? First quarter growth at an annualized 3.2% (vs 3.4% expected) was a fairly strong number, though it was slower than last quarter's 5.6% pace. A few of the major components were also robust:

Personal consumption expenditures + 3.6%
Business investment in equipment and software +13.4%
Exports +5.8%

Business investment in particular has been quite encouraging and these numbers have been reflected in durable goods orders as well as industrial production in recent months. In the previous recession, business investment took a long time to truly begin recovering whereas this recovery in business investment appears to be coincident with the overall recovery.

Some have said but for the inventory adjustments, growth would have been meager. I wonder where these people were when the inventory adjustments made our contraction look much steeper in Q4 2008 and Q1 2009. Frankly, inventory adjustments are not just some accounting game, but I can discuss that another time.

That being said, there were some notable weak points. Residential investment fell after rising in Q4 while business investment in structures (mainly commercial real estate investment) continued to implode. Both of these areas will be weak for some time to come.

GDP release here: BEA GDP Release

Chicago PMI, Kansas City Fed Survey, Richmond Fed Survey

Some of the many manufacturing surveys that are expressed in the form of a diffusion index. This is an index where the number of respondents saying business is getting worse is subtracted from those saying business is getting better. The Chicago PMI uses the 50 level to indicate break even while the Richmond and Kansas City Feds use 0. Some take a strict level such as 14% say business was getting better while 12% said it was getting worse for a level of 2, or 51 in the case of the Chicago PMI. Others do seasonal and other adjustments and the exact calculation is hard to determine. We will go over this in the national ISM release next week.

In any case, these are good first indicators for the turning points in the economy. They come out earlier than nearly any other indicator and are generally pretty useful as proxies for industrial production. I used these indicators (specifically the Richmond and Kansas City Fed surveys) last year to get the edge on some who thought that the economy was not recovering rapidly enough to justify the stock market rally.

What are they saying now? All signs are good to go.

The Chicago PMI came in at a very robust 63.8, well into rapid expansion territory. Production, New Orders, and Employment indexes came in at 63.1, 65.2, and 57.2 respectively.

Link: Chicago PMI

The Kansas City and Richmond Feds confirmed the strength of the manufacturing recovery. I'll spare you the details and you can instead go to the sources:

Kansas City

Jobless Claims

Weekly initial unemployment insurance claims are a high frequency data set that are fairly useful in determining the health of the labor market. They should be interpreted as, for lack of a better term, the gross number of people losing employment and going on UI benefits. You will see the ill-informed saying "450,000 people lost their jobs last week? How is this good news?". That's not what this series is. Even in boom times we almost never get below 300,000 a week. The labor market is highly dynamic.

Jobless claims have become difficult to interpret in this recession. As we have moved toward job gains in the monthly employment reports, they have not declined in the manner one would expect. Last week we stayed at around 450,000, which is normally a pretty horrid number. However, this appears to be at approximately the break even point for right now. Part of what may be happening here is that temporary employment has really taken off in recent months and as temporary workers move between jobs at the temp agencies more are going on UI. Also, the Senate has periodically delayed UI benefit extensions and when they do eventually get approved those who re-apply for UI benefits that had been on them previously count as new initial claims.

In general, the decline in UI claims seems to have flattened out, which is a little worrisome. We will see what happens next week with the monthly employment report.

Link: DOL Initial UI Claims

The Rest: Consumer Confidence, MBA Purchase Applications, Weekly Retail Sales

There was also the Michigan Consumer Confidence Index. Economists worry a lot about consumer confidence as a proxy for spending, however, evidence is mixed as to how useful these surveys are at predicting spending behavior.

Weekly retails sales as reported by ICSC and Redbook show month to month declines from March, but this appears to have to do with the Easter calendar shift more than anything. Retail sales are still well on a path to recovery.

Mortgage Banker Association Purchase Applications have had a strong run due to the home buyer tax credit, but will likely fall off with its expiration. Frankly, real estate data of nearly every kind will be very hard to interpret for months thanks to these distortions. This is not a political position on whether or not it should have been done, but it is a warning in looking at any home sales data for some time.

View these at the Bloomberg Economic Calendar

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