{"id":1804,"date":"2010-10-02T10:00:34","date_gmt":"2010-10-02T14:00:34","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=1804"},"modified":"2018-08-17T14:14:44","modified_gmt":"2018-08-17T18:14:44","slug":"examining-the-latest-economic-crop","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2010\/10\/02\/examining-the-latest-economic-crop\/","title":{"rendered":"Examining the latest economic crop"},"content":{"rendered":"<p><span style=\"font-size: 16px;\">Last week saw the arrival of a freshly picked economic data crop.\u00a0 Let&#8217;s take a close look at some of the important data&#8230;<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">In August U.S. consumer spending rose by 0.4%. This was the same level as for July.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> While it is encouraging to see consumer spending both positive (up 0.4%), and a non-downward trend, the fact is that consumer spending is anemic right now.\u00a0 Until the U.S. unemployment rate improves I continue to expect meager increases in consumer purchases.\u00a0 This means that U.S. economic growth is also likely to slow since consumer spending is around two-thirds of U.S. economic output.\u00a0 And obviously you never want just 0.4% growth in two-thirds of your economy.<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><strong>Importance grade:<\/strong> 10; along with the unemployment rate, there is no more important piece of economic data than the level of U.S. consumer spending.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Personal incomes rose 0.5% in the month of August.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> Often in analyzing these data the names are so bland that it is difficult to discern what the heck the data represent.\u00a0 Unfortunately, this makes them more difficult to understand.\u00a0 Personal incomes up half a percent means that people had a little bit of extra money to spend in the month of August than they did before.\u00a0 I feel it is always important to compare the personal income figure to the consumer spending figure.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Ideally, consumers have a healthy combination of spending, so that the economy grows, and savings, so that the consumer financial situation is less risky.\u00a0 In other words, just like any other investment you need to focus on return (spending\u00a0growth) and risk (savings growth).<\/span><\/p>\n<p><span style=\"font-size: 16px;\">In August people earned more than they spent.\u00a0 Incomes were up 0.5% while spending was up only 0.4%.\u00a0 So logically you would expect the savings rate to be up as well (see below).\u00a0 There is meaning in these simple comparisons and you can do it yourself &#8211; I promise &#8211; however, there is also value to a more in-depth analysis.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">While personal incomes were up 0.5% in August, unfortunately\u00a0much of that income came from additional government payments to households such as Social Security.\u00a0 When you back out those payments, personal income growth was flat with the month of July.\u00a0 Clearly this is not a good sign.\u00a0 Additionally, this jibes with overwhelming common knowledge that businesses just are not hiring new employees or giving generous paycheck raises to folks.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">So we have our second economic data point in a row that is flat.<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><strong>Importance grade:<\/strong> 10; long-term readers of the blog know that I don&#8217;t hand out 10s to much data.\u00a0 In fact, I pride myself on examining the useful and the useless data because there is so much noise out there data-wise that it is difficult to know which data are important.\u00a0 But if two-thirds of the U.S. economy is consumer spending and yet personal income growth is flat, you clearly have an undesirable situation.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">The savings rate was 5.8% in August.\u00a0 That figure represents a slight increase from the July figure.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> Another confusing aspect of analyzing data is telling the difference between a\u00a0straight percentage and a percentage increase in a percentage, that is, growth.\u00a0 The above data were growth figures and represented dynamic change.\u00a0 While the savings rate is simply a flat percentage saying that consumers are currently saving 5.8 cents of every dollar that they earn.\u00a0 In August they were saving a slightly higher\u00a0amount than in July.\u00a0 If we wanted to look at the data in a similar fashion to how we evaluated consumer spending and personal income growth we would calculate the percentage change from July to August.\u00a0 Instead, these data (confusingly) are reported differently.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">I am a big fan of savings.\u00a0 For over a decade the U.S. consumer spent more than he earned.\u00a0 This excess spending was funded by the consumer in two ways: a depletion of savings and a use of debt, often credit card debt, to extend her purchasing power.\u00a0 Clearly in the long-run an economy cannot afford to borrow more than it makes as eventually lenders figure out that there is no collateral to back the loan.\u00a0 Ouch!\u00a0 Right now U.S. consumers are getting their financial houses in order.\u00a0 This is one of the reasons for anemic consumer spending and economic growth right now.\u00a0 In the short-run this creates slow economic growth, but in the long-run it leads to greater economic health and stability.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">So again, I am a big fan of savings and am glad that the savings rate was up in August and has been up for almost two years now.\u00a0 This bodes <span style=\"text-decoration: underline;\">very well<\/span> for the long-term health of the U.S. economy.<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><strong>Importance grade:<\/strong> 6, 10; the two values are for two different time frames: short and long-term.\u00a0 In the short-run it is not particularly important that the U.S. consumer is saving more money.\u00a0 In fact, it is a drag to the economy.\u00a0 However, in the long-run it is critically important that consumers have a healthy combinatin of both spending and saving.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">August saw the\u00a0University of Michigan consumer sentiment index\u00a0rise to 68.2 from 66.6.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> Here is another tricky data element because the index value of 68.2 means what exactly?\u00a0 I&#8217;m not entirely sure either.\u00a0 However, the trend is that consumer sentiment rose and is getting closer to the mid-70s levels seen earlier this year when the economic recovery seemed much stronger.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">You may have thought to yourself many times that the mood of the consumer is very important to the economy.\u00a0 You would be right.\u00a0 Grumpy or depressed consumers just don&#8217;t buy as much stuff as happy and elated consumers.\u00a0 That&#8217;s what the consumer sentiment index attempts to evaluate.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Briefly: it&#8217;s a good thing that it is up and is getting stronger.<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><strong>Importance grade:<\/strong> 8; while I am encouraged that consumers are feeling better about the world, consumers are also notoriously backward looking in evaluating things.\u00a0 That is, they forecast the future based on what has just happened.\u00a0 So an increase in consumer sentiment is typically in response to economic data that have occurred in the more distant past.\u00a0 In this case, it is likely that the U.S. consumer was relieved by the fact that the economy didn&#8217;t melt down in March, April or May as was being talked about at the time.\u00a0 However, this isn&#8217;t particularly relevant to the future.\u00a0 However, improving consumer sentiment does mean that he or she is more pre-disposed with spending.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">In August manufacturing activity declined by 1.9% to a level of 54.4 as measured by the Institute of Supply Management&#8217;s index.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> That manufacturing has slowed is not a good sign.\u00a0 The reason is that manufacturing typically requires a large upfront\u00a0investment in materials in order to make something.\u00a0 Orders for these raw materials often have to anticipate and precede demand.\u00a0 So a decline in manufacturing activity frequently presages a decline in the overall economy.\u00a0 However, don&#8217;t start playing &#8220;Taps&#8221; on your trumpet just yet because a level of 54.4 is above 50.\u00a0 And why is that important?\u00a0 Because of the way the index is calculated, any number above 50 still represents growth.\u00a0 In this case, manufacturing activity\/growth slowed, but did not turn negative.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">I am fond of saying that one data point does not make a trend.\u00a0 Even two data points only make a line.\u00a0 You need at least three data points to begin to discern a real trend.\u00a0 In this case, we only have one negative data point and the jury is still out as to whether this is something we should be concerned about or not.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">I know what you&#8217;re thinking: but by the time we have confirmed we are in a downturn again, it will be too late, so what can we do?\u00a0 It&#8217;s true, this is the perennial investment problem: data only answer questions about the past, but as investors we are interest in the future.\u00a0 But, what do we do to better understand the future?\u00a0 That is the subject of a future blog post and not coincidentally the subject of my new book (!) just published:<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><em>The Intuitive Investor: a radical guide for manifesting wealth<\/em><\/span><\/p>\n<p><span style=\"font-size: 16px;\">Order it from Amazon, or from me personally.\u00a0 If you order it from me personally you will pay the cover price, but you will also get an autographed copy directly from me.<\/span><\/p>\n<p><span style=\"font-size: 16px;\"><strong>Importance grade:<\/strong> 6; manufacturing makes up such a low percentage of our services driven\u00a0economy that it simply is just not that important any longer.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">In my next post I summarize what all of this data mean for you right <strong>now<\/strong>.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Last week saw the arrival of a freshly picked economic data crop.\u00a0 Let&#8217;s take a close look at some of the important data&#8230; In August U.S. consumer spending rose by 0.4%. This was the same level as for July. Analysis: While it is encouraging to see consumer spending both positive (up 0.4%), and a non-downward [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-1804","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/1804","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=1804"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/1804\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=1804"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=1804"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=1804"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}