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Updated 2009-10-29 US GDP grew by 3.5% in Q3 for the first time in couple years. But that growth could be due to government spending rather than consumer spending. On the flip side, P&G, kellogg & Colgate Palmolive saw increase in Q3 profits. Updated 2009-10-29 Retail sales, excluding motor vehicles & parts increased in September 2009. However, industrial production fell, prices in manufacturing sector decreased and new home sales & housing starts decreased. However, sales of existing homes increased. Imports also increased withe exports remaining constant since last month. So inflation is not a risk right now. Purchasing Managers Index staying above 50% mark indicates that the economy continues to expand. Budget deficit also decreased which could result in a break in government spending and no more increase in taxes. Another reason why there is no inflation risk currently.
US GDP grew by 3.5% in Q3 for the first time in couple years. But that growth could be due to government spending rather than consumer spending. On the flip side, P&G, kellogg & Colgate Palmolive saw increase in Q3 profits indicating that consumer goods sectors are doing well. We could very well see a decrease in unemployment in October 2009! Updated 2009-09-29 FACTS - Cost of money is cheap. Retail sales are wavering. Consumer confidence fell after growing. Industrial production is back-traking again. Capacity utilization is still below the 85% inflationary threshold, but growing slowly. Inventory pile up is decreasing. Prices in manufacturing sector are growing. Auto & truck sales are increasing, but inflation is also rising slowly. Investments in housing sector is growing and so is construction spending. Personal disposable income is increasing while budget deficit has reduced. Exports are growing and imports appear to start a decent. Increasing in purchasing managers index reveals that economy is expanding. Unemployment is at an all time high.
ANALYSIS - Production is growing, inventories are decreasing and industrial capacity is being utilized more & more. Investments in housing sector and auto & trucks are also increasing. Exports are growing as well. These indicators reveal that economy is making a strong attempt to grow. But the magic factor that will throw the growth into fast gear is employment, which appears to be at an all time low currently. This is why the retail sales are wavering without picking either of the incline or decline. Increase in inflation (CPI & PPI) is not a concern currently, since labor cost per unit is falling, and both CPI & PPI need to come out of the negative growth phases. Ultimately, it rests on the unemployment indicator. If that indicator next month shows a decline in unemployment in the country, then US economy is posied for getting out of recession soon. Updated 2009-09-23 POSITIVES - Increase in export orders, decrease in import orders & decrease in budget deficit indicates that US economy is beginning to expand. Decrease in budget deficit means that bail out packages from government spending will decrease. Increase in housing starts means that investment spending is on the rise once again. Increase in industrial production & purchasing managers index indicates that economy is expanding and we may soon see a decrease in the unemployment rate. Capacity utilization is within its limits indicating that demand pull inflation is not currently a risk. Finally, retail sales increased showing that consumer demand is finally increasing.
NEGATIVES - Prices are increasing, mainly driven by cost of raw materials - increase in consumer price index inflation is due to increase in gas prices & increase noted in producer price index. This means that we are currently facing a cost push inflation risk. Prices in manufacturing sector has also increased from July 09 indicating that cost push inflation risk may become reality soon.
PUTTING IT ALL TOGETHER - With unemployment still being high, we are still at the bottom of the recession, but increasing production & manufacturing activity may lead to employment recovery to a certain extent. Consumer demand has increased a little bit, which is a positive sign that businesses may try to curtail cost push inflation by using economies of scale - increasing production activity to spread the cost of raw material over a large volume of products. This may lead to increased hiring activity and with the cost of money still being cheap (interest rates still in their lows), increased borrowing and investing activity may increase leading to a pick up across all sectors. Ending of the recession is in sight. Updated 2009-09-18 Using macro economic indicators to invest in stocks
There is a plethora of investment strategies and investment advice when it comes to stock trading. However, one element that is most often overlooked by all stock traders or investors & professional analysts and advisors is the impact of the country’s macro economic indicators, such as consumer price index, producer price index, retail sales, new home sales, construction spending, etc.
Let’s face it, stock markets don’t rise & fall due to investment activity of individual investors but do so due to trading activity of institutional investors (think mutual fund companies vs. you). These companies make decisions often using the latest movements in the macro economic indicators, since such movements do impact the business & profitability of the underlying companies they invest in! Let me give you an example, say the Consumer Price Index shows a change from same month previous year of 3% (i.e. current inflation is 3%), but the same reading last month was 1%, then you know that inflation is expanding in the country. Inflation is often looked upon as a malefic, i.e. increasing inflation is seen as having a negative impact on economic growth – growing inflation means consumers could afford less, resulting in drop in sales, causing a drop in revenues of businesses, causing decreasing earnings & profitability. Hence, if the current interest rates are below the 3% inflation as in this example, the Federal Reserve may be tempted to curtail this growth in inflation by raising its discount rate or federal funds rate. That is a bearish sign for the stock markets, since an increase in interest rates increases the cost of money leading to a cutback in spending money by businesses – in other words investors will have less money to invest in the stock markets. Thereby resulting in a decline in the stock market.
This is an example considering only two macro economic indicators, consumer price index & interest rates. In reality, you have to deal with the movements in many indicators to assess whether the impact on the stock markets would be bullish or bearish! In order to demonstrate how you can utilize the macro economic indicators to determine your stock trading needs, consider the scenario today, September 16, 2009. The latest movements in the indicators, as discussed in http://www.macrostockinvestor.com , show that that the U.S. economy appears to be approaching the end of the recession but has not quite crossed over into expansion phase of the economic cycle. Usually, the stock market cycle leads the economic cycle, i.e. the stock markets have started their ascent to the bullish ranges just as the economic cycle has bottomed out. This explains the gains noted in Dow & Nasdaq in the recent months. Consider the impact of each of the macro economic indicators below, individually –
1. Interest rates (Discount rate & Federal Funds rate) are at the bottom, making money cheap,
2. Retail sales in August 09 showed an increase from July 09 by 1.1%,
3. Inflation, as measured by change in the Consumer price index, is at -1.5% in August 09, but noting an increase of 0.4% compared to July 09. Mainly led by increase in gas prices,
4. Manufacturing sector appears to be expanding as reflected by an increase noted in the Purchasing Manager’s Index in August 09 by 4% from July 09,
5. Industrial production in August 09 increased by 0.8% from July 09 signaling that business activity is expanding hinting at a potential rise in employment in the near future,
6. Capacity utilization in August 09 is at 69.6% signaling that there is no over utilization of capacity currently hinting that inflation fears don’t currently exist in the economy,
7. Prices in the manufacturing sector as well as the producer price index in August 09 increased from July 09, mainly led by utilities & energy. Hints that such increases could soon be transferred to retail prices, i.e. we could soon expect the consumer price index (inflation) to start creeping up,
8. Unemployment measured by The Jobs Report increased to 9.7% in August 09, indicating that the U.S. economic cycle hasn’t yet reached the trough or the bottom,
9. Budget deficit in August 09 has decreased from July 09, indicating that government doesn’t need to borrow more money to finance such deficits & thereby doesn’t drive up the interest rates. Bullish sign,
10. Manufacturing export orders per NAPM report in August 09 is 55.5%, with an increase from July 09 by 5%. Increase in exports & decrease in imports indicates that trade deficit might narrow,
11. Manufacturing import orders per NAPM report in August 09 is 49.5%, with an increase from July by 5%. Increase in exports & decrease in imports indicates that trade deficit might narrow.
Individually, each of the above indicators have their own impact on the stock markets. However, if you look at the indicators & aggregate their impacts, you see a trend emerging – money is cheap, production is increasing and capacity utilization to produce at each business is rising. Prices have also started their ascent just as retail sales are increasing as well, mainly led by energy & utilities. Coupled with the fact that the export orders are increasing and budget deficits are decreasing is a sign that the government is unlikely to spend more money (bail outs, etc) in the near future. All these are indicative of the expansion phase of the economic or business cycle. This also is indicative of the fact that the unemployment rate might not get any worse, but might start decreasing in the next coming months. Expansion phase is stock market friendly, hence the recent surge in the stock market! Particularly energy sector is lucrative for investment right now. Stock markets hate inflation & surges in unemployment rates. Inflationary scenarios could mean interest rate increases by the Federal Reserve and that action is a bearish sign for the stock markets. But we currently are nowhere close to such a scenario given that inflation is still well below the danger mark of 2%. Rising unemployment rate is indicative that recession is nearing, however, based on above factors, it appears that we are nearing the end of further decreases in unemployment rates and we could expect business activity & hiring to pick up as we approach fourth quarter of this year.