Posted on: Sunday, January 28, 2001
Several pulse points measure health of economy
Advertiser News Services
A rise in the number of new houses under construction surely means the economy is about to boom. A fall in retail sales surely means the economy is cooling off. But what does it mean when both of those statistics were for the same month?
What about the measure of orders for goods that people keep for several years, such as cars and refrigerators, which rose in September - but then fell in October?
What do the statistics mean? And which ones are important? And do any of them reliably predict the future of the economy? Is a recession ahead? Has it already begun?
Piece by piece, the thousands of economic statistics that the federal government and private industry tabulate every month help paint the picture of the national economy that drives financial decisions by individuals, businesses and government.
"I think of it as a huge jigsaw puzzle with tiny little pieces, and every day I get a couple of new ones," Stuart Hoffman, chief economist with PNC Financial Services Group in Pittsburgh, said of the steady stream of economic reports. "In the real world, it’s a changing puzzle. It’s not like you solve it and you’re done."
Different statistics come in and out of fashion with the economic cycle. A decade ago, economists lived and died by the Federal Reserve Board’s measures of money supply, its estimate of the total amount of money in the economy. Now, Hoffman said, few economists give that much weight.
Individual investors can’t easily know which statistics are important - unless their stock portfolios soar or plummet on the release of the data. And paying attention to every newly released statistic is almost a guarantee of confusion. "Watching high-frequency data can be dangerous to your health," said David Wyss, chief economist for Standard & Poor’s Corp. in New York.
Economists, though, do agree on the importance of a half-dozen statistical indicators, in times of growth as well as recession. These are the measures that seem to reliably describe the state of the economy and, over time, hint at its direction.
 Employment Situation report
If economists had to choose a favorite measure, this probably would be it. "It has a lot of numbers in it, a lot of stuff to analyze," Wyss said.
Released by the Department of Labor on the first Friday of every month, it is the first major indicator of what happened the previous month. As such, it can move stock markets.
Important numbers: How many jobs were gained or lost; the jobless rate; and average hourly earnings, a gauge for inflation.
The report is compiled from two surveys: The Current Employment Statistics, a look at 380,000 non-farm businesses on numbers of workers, wages and work hours; and the Current Population Survey, which is conducted by 1,500 Census Bureau workers interviewing members of 50,000 households about their work status.
Gross Domestic Product
Released quarterly by the Commerce Department, the gross domestic product, or GDP, is the market value of all goods and services produced in the United States. Changes in GDP show whether the economy is growing and at what rate.
"It is really the most comprehensive picture of the overall economy," said Sung Won Sohn, chief economist for Wells Fargo & Co. in Minneapolis.
To calculate the GDP number, a staff of about 100 at the Bureau of Economic Analysis collect and organize thousands of economic data compiled by private sources and government agencies. The statistics fall into four categories: consumer spending, net exports, business investment, government spending and investments.
Retail sales
Diane Swonk, chief exonomist of Bank One Corp. in Chicago notes that "two-thirds of the economy is the U.S. consumer." And consumer purchases are retail sales.
The government began reporting retail sales monthly in 1951 to provide timely data for the Gross National Product. Now, each month, sales questionnaires are sent to more than 12,000 grocers, jewelers, butchers, bookstores, drugstores, gas stations, auto dealers and other retailers. E-commerce sales were added in October.
A new sample of retailers is drawn every five years based on the latest census data. The sample also is updated quarterly to replace businesses that have closed.
Consumer Price Index
Calculated monthly by the Bureau of Labor Statistics, this cost-of-living index measures changes in the prices that urban consumers pay for a selection of goods and services. Critics say the CPI tends to overstate inflation and doesn’t accurately reflect shopping habits. But it is the most widely watched inflation gauge.
About 275 field representatives visit stores, apartments and businesses in 87 cities each month to record prices of 80,000 items - including eyeglasses, gasoline, rent, cupcakes, beer, breakfast cereal, tuition, software and funeral services. The basket items are revised every 10 years, based on consumer diaries. Beginning in 2002, the basket will be updated every two years.
The index base is 1982 to 1984 - the prices of that period define the CPI’s measure of "100." As of November, the index reached 174.1, meaning prices have risen 74.1 percent since the base period. CPI is usually reported as a percentage increase or decrease over the previous month or past year.
Purchasing Managers Index
Critics say this index focuses only on manufacturing and doesn’t show how much the sector has grown or shrunk, but the purchasing managers index, or PMI, still enjoys a rarefied status.
"It traditionally has been one of Mr. (Fed Chairman Alan) Greenspan’s favorite surveys to monitor," said Carol Stone, deputy chief economist for Nomura Securities in New York.
Based on a survey of about 400 purchasing executives by the National Association of Purchasing Management, the PMI measures whether production, employment, inventories, new orders and supplier deliveries are better than, worse than or the same as the month before.
All the "betters" and half of the "sames" are added together to produce the index number, said Norbert Ore, who oversees the survey. A figure above 50 percent means growth; anything below that signals contraction.
Index of Leading Economic Indicators
Published by the Conference Board, a nonprofit business research organization in New York, this index is intended to predict the economy’s direction three to six months in advance. The index has 10 components: stock prices, housing permits, money supply, consumer expectations, interest-rate spread, vendor performance, weekly initial claims for unemployment insurance, average work week in manufacturing, new orders for consumer goods and new orders for non-defense capital goods.
Other measures
Other measures include housing starts, trade deficit figures, consumer confidence and the stock market. Sohn sees the stock market as a key indicator because market corrections precede recessions. "The problem is the stock market predicts recessions too often," he said.
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