Chris Rowe's Market Wrap Up June 30, 2008
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
Mark Your Economic Calendar: What's ahead for the week of June 30, 2008
Economic Calendar for the Week of June 30 - July 04
Monday, June 30
09:45 Chicago PMI
Release Details
* Importance (A-F): The Chicago PMI merits a B.
* Source: Chicago Purchasing Managers Association.
* Release Time: Last business day of the month at 10 ET for the current month.
In Brief
There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The New York and Philadelphia Fed's surveys are the first each month followed by the Chicago purchasing managers' report on the last day of each month. A few, such as the Atlanta and Richmond Fed surveys, are released after the ISM and are of little value. The purchasing managers' reports are measured like the national ISM -- 50% marks the breakeven line between an expanding and contracting manufacturing sector. For the New York, Philadelphia and Atlanta Fed indexes, 0 is the breakeven mark. These surveys can be of some help in forecasting the national ISM.
10:00 University of Michigan Consumer Sentiment Index
Release Details
* Importance (A-F): This release merits a B-.
* Source: The University of Michigan.
* Release Time: Preliminary: 10:00 ET on the second Friday of the month (data for current month); Final: 10:00 ET on the fourth Friday of the month (data for current month).
The Michigan index is almost identical to the Conference Board Consumer Confidence index, though there are two monthly releases, a preliminary and final reading. Like the Conference Board index, it has two subindexes - expectations and current conditions. The expectations index is a component of the Conference Board's Leading Indicators index.
Tuesday, July 1
10:00 ISM: Institute for Supply Management
Release Details
* Importance (A-F): This release merits an A-.
* Source: Institute for Supply Management
* Release Time: 10:00 ET on the first business day of the month for the prior month.
* Raw Data Available At: http://www.ism.ws/.
In Brief
The ISM report is a national survey of purchasing managers which covers such indicators as new orders, production, employment, inventories, delivery times, prices, export orders, and import orders. Diffusion indexes are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.
The total index is calculated based on a weighted average of the following five sub-indexes, with weights in parentheses: new orders (30%), production (25%), employment (20%), deliveries (15%), and inventories (10%).
The ISM is one of the first comprehensive economic releases of the month, typically preceding the employment report. Though it covers only the manufacturing sector, it can often provide accurate hints regarding the tone of subsequent releases. During periods of inflation concerns, the prices paid and vendor deliveries indexes often determine the bond market's reaction to the report.
Highlights
* A generally stable read the past few months. That isn't so bad considering that the actual industrial production data have held up well. A reading of 49.6 is below the 50 level that is supposed to show overall growth, but this survey is not precise and a reading at this level is not raising red flags. Furthermore, orders and production were up in May, with production at a very good 51.2 reading. As noted in the ISM press release, this ISM level and the average since January are consistent with moderate real GDP growth.
Big Picture
* This is a highly over-rated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. That may well be what is happening at present with exports booming at large firms, but not necessarily across all manufacturing sectors. The current readings on the ISM manufacturing index are providing a more negative view of conditions than the actual industrial production data. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends.
Thursday, July 3
08:30 Average Workweek - The Employment Report
Release Details
* Importance (A-F): This release merits an A.
* Source: Bureau of Labor Statistics, U.S. Department of Labor.
* Release Time: First Friday of the month at 8:30 ET for the prior month
* Raw Data Available At: http://stats.bls.gov/news.release/empsit.toc.htm.
In Brief
The employment report is actually two separate reports which are the results of two separate surveys. The household survey is a survey of roughly 60,000 households. This survey produces the unemployment rate. The establishment survey is a survey of 375,000 businesses. This survey produces the nonfarm payrolls, average workweek, and average hourly earnings figures, to name a few. Both surveys cover the payroll period which includes the 12th of each month.
The reports both measure employment levels, just from different angles. Due to the vastly different size of the survey samples (the establishment survey not only surveys more businesses, but each business employs many individuals), the measures of employment may differ markedly from month to month. The household survey is used only for the unemployment measure - the market focuses primarily on the more comprehensive establishment survey. Together, these two surveys make up the employment report, the most timely and broad indicator of economic activity released each month.
Total payrolls are broken down into sectors such as manufacturing, mining, construction, services, and government. The markets follows these components closely as indicators of the trends in sectors of the economy; the manufacturing sector is watched the most closely as it often leads the business cycle. The data also include breakdowns of hours worked, overtime, and average hourly earnings.
The average workweek (also known as hours worked) is important for two reasons. First, it is a critical determinant of such monthly indicators as industrial production and personal income. Second, it is considered a useful indicator of labor market conditions: a rising workweek early in the business cycle may be the first indication that employers are preparing to boost their payrolls, while late in the cycle a rising workweek may indicate that employers are having difficulty finding qualified applicants for open positions. Average earnings are closely followed as an indicator of potential inflation. Like the price of any good or service, the price of labor reacts to an overly accommodative monetary policy. If the price of labor is rising sharply, it may be an indication that too much money is chasing too few goods, or in this case employees.
Highlights
* The increase in the unemployment rate to 5.5% for May got a lot of attention, but it is not significant to GDP or other economic variables. It was due to an increase in the labor force and unemployed, not a decline in employment. For the two months of April-May, the level of employed in the household survey actually showed an increase of employed of 77,000, even while the unemployment rate jumped from 5.1% to 5.5%.
* The decline of 49,000 (0.04%) in nonfarm payrolls continues a trend of small declines in payrolls consistent with GDP growth near 1.5%.
* Hourly earnings bounced back to a 0.3% gain after a 0.1% increase in April. This will help boost income gains.
* The average workweek and manufacturing workweek were flat. This is disappointing given the declines in April. A rebound in the manufacturing workweek would have suggested a better gain in industrial production for May.
Big Picture
* Payroll trends are weak, but not as weak as in true recessions. The average monthly decline in payrolls so far in 2008 is 65,000. In the 2001 recession, payrolls held up well the first three months, actually increasing by a net 15,000. In April 2001, however, payrolls plunged 281,000. That was followed by declines averaging 115,000 per month the next four months. Payrolls plunged even further after 9/11/2001. The current trend in payrolls equates to about a 0.6% annual rate of decline. Given productivity gains, this correlates with modest real GDP growth rather than declines in real GDP.
10:00 Non-Manufacturing ISM: Institute for Supply Management
Release Details
* Importance (A-F): This release merits an improved B-.
* Source: Institute for Supply Management
* Release Time: 10:00 ET on the third business day of the month for the prior month.
* Raw Data Available At: http://www.napm.org.
In Brief
The non-manufacturing ISM report is a national survey of purchasing managers which covers new orders, employment, inventories, supplier delivery times, prices, backlog orders, export orders, and import orders. Diffusion indexes are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.
The index should be far more indicative of the broader economy given its inclusion of service-producing as well as good-producing sectors outside of manufacturing. However, the short history of the index dates to only July 1997 and doesn't provide the insight of a longer period inclusive of varied economic climates. The seasonal adjustment of the index didn't begin until January 2001 with only 3 of the 9 components seasonally adjusted as of April 2001. The lack of historical data and lack of a tight correlation to the non-manufacturing economy leaves the relatively poor "B-" rating compared to the "A-" rating of the well-respected manufacturing ISM index.
Highlights
* Broad based improvement in the components.
* Business Activity component has been above 50 for past three months.
* Employment index improved significantly, mirroring the improved April payroll data.
Big Picture
* The ISM services index is not a major economic indicator. It is a survey that provides some general indications of trends in the services sector, but not much more. The index dipped surprisingly in January, but has improved each month since then. At 52.0 for April and with an employment index above 50, this month's reading provides confirmation of the improved trends in other economic series and has helped ease some of the alarmist concerns about economic conditions.
