Economic Indicators

The Inflation Forecast now incorporates actual total and core Consumer Price Index data for April 2012. The actual total (core) inflation rate for April is slightly lower than (slightly higher than) forecasted.

The new actual and forecasted inflation rates will flow into Real Earnings Yield Model projections about the end of May.

Which consensus forecast of U.S. economic indicators is best? How does the U.S. equity market react to consensus forecast errors? In their April 2012 paper entitled “Market Reaction to Information Shocks: Does the Bloomberg and Briefing.com Survey Matter?”, Linda Chen, George Jiang and Qin Wang investigate the accuracy of, and equity futures market reactions to, competing Bloomberg and Briefing.com survey-based forecasts for the values of scheduled weekly, biweekly, monthly and quarterly economic announcements. They focus on 14 announcements commonly treated as important: Building Permits, Capacity Utilization, Case-Shiller 20-city Index, Consumer Confidence, Consumer Price Index, Durable Goods Orders, Existing Home Sales, GDP Advance, Leading Indicators, Non-farm Payrolls, Personal Spending, Producer Price Index, Retail Sales and Unemployment Rate. They introduce standardization to compare errors across different indicator scales. Using consensus forecasts and announced values of 59 economic indicators, along with contemporaneous high-frequency price and volume data for the nearest S&P 500 futures contract (as available), over the period January 1998 through August 2010, they find that: More…

The business media and expert commentators sometimes cite the U.S. unemployment rate as an indicator of economic and stock market health, generally interpreting a jump (drop) in the unemployment rate as bad (good) for stocks. Is this indicator in fact predictive of U.S. stock market behavior in subsequent months, quarters and years? Using the monthly unemployment rate from the Bureau of Labor Statistics and contemporaneous S&P 500 Index data for the period January 1950 through March 2012 (747 months), we find that: More…

U.S. job gains or losses are a prominent element of the monthly investment-related news cycle, with the the business media and expert commentators generally interpreting changes in employment as an indicator of future economic and stock market health. One line of reasoning is that jobs generate personal income, which spurs personal consumption, which boosts corporate earnings and lifts the stock market. Are these data in fact predictive of U.S. stock market behavior in subsequent months, quarters and years? Using monthly seasonally adjusted nonfarm employment data from the Bureau of Labor Statistics and contemporaneous S&P 500 Index data for the period January 1950 through March 2012 (747 months), we find that: More…

Since May 2006, the monthly ADP National Employment Report has presented “estimates of nonfarm private employment…constructed from ADP’s data on payrolls following a procedure similar to that used by the BLS [Bureau of Labor Statistics] to process its monthly survey of Current Employment Statistics into the ‘official’ estimates of establishment employment. The ADP National Employment Report is released, for public use only, two days prior to the Employment Situation.” Does this report affect or predict U.S. stock market returns on the day of release or during the ensuing month? Using ADP report release dates and estimates of total nonfarm employment for April 2006 through March 2012 (72 months) and contemporaneous daily and monthly dividend-adjusted levels of SPDR S&P 500 (SPY), we find that: More…

In a past entry in his blog, guru Marc Faber observes: “There seems to be an inverse relationship between the savings rate and the stock market performance. When the savings rate is declining it is favorable for equities whereas when savings rate is increasing such as was the case in the late 1960′s, early 1980′s, and now, stock prices tend to move sideward or down.” Is this belief correct? If so, can investors exploit it? To check, we relate the U.S. personal saving rate as estimated quarterly by the Bureau of Economic Analysis (as a percentage of disposable personal income) to the quarterly change in the S&P 500 Index. Using data from the first quarter of 1950 through the first quarter of 2012 (249 quarters), we find that: More…

Do economic announcements systematically remove uncertainty from financial markets and thus reliably lower implied volatility indexes? In their September 2010 paper entitled “The Impact of Macroeconomic Announcements on Implied Volatilities”, Roland Füss, Ferdinand Mager and Lu Zhao measure the reactions of the Chicago Board Options Exchange Volatility Index (VIX) and the DAX Volatility Index (VDAX) to U.S. and German macroeconomic announcements. They consider announcements of Gross Domestic Product (GDP), the Producer Price Index (PPI) and the Consumer Price Index (CPI). The measurement interval is apparently close-to-close from the day before to the day of announcement. Using monthly/quarterly macroeconomic announcement dates from January 2005 through December 2009 and contemporaneous daily data for VIX and VDAX (60 months), they find that: More…

A reader asked whether the behavior of the stocks of homebuilders anticipate the overall equity market. To check, we first assemble a simple index of the performance of homebuilder stocks as the equally-weighted average monthly return for the stocks of DR Horton, Hovnanian, KB Homes, Lennar, Ryland and Pulte, starting with Pulte in August 1985 and adding the others as they are listed. Comparing these returns with monthly returns for the S&P 500 Index data for August 1985 through March 2012 (320 monthly returns), we find that: More…

Investors arguably expect that holdings earn profits in excess of the inflation rate. Do different measures of the inflation rate indicate materially different investment yield discounts? To investigate, we consider how the following two pairs of lagged annual inflation rates related to the S&P 500 annual operating earnings yield (E/P, lagged from Standard & Poor’s and forward from the Earnings Forecast), the S&P 500 annual dividend yield (lagged from Standard and Poor’s) and the 10-year Treasury note (T-note) and 3-month Treasury bill (T-bill) annualized yields:

1. The non-seasonally adjusted inflation rate based on the total Consumer Price Index (CPI) from the Bureau of Labor Statistics (retroactive revisions of seasonally-adjusted data confound historical analysis).
2. The non-seasonally adjusted inflation rate based on core CPI from the Bureau of Labor Statistics.
3. The inflation rate based on the Personal Consumption Expenditures: Chain-type Price Index (PCEPI) from the Federal Reserve Bank of St. Louis.
4. The trimmed mean PCE inflation rate from the Federal Reserve Bank of Dallas.

Using monthly data for all variables during March 1989 through February 2012 (23 years), we find that… More…

A reader commented and asked: “A wide credit spread (the difference in yields between Treasury notes or Treasury bonds and investment grade or junk corporate bonds) indicates fear of bankruptcies or other bad events. A narrow credit spread indicates high expectations for the economy and corporate world. Does the credit spread anticipate stock market behavior?” To investigate, we define the credit spread as the difference in yields between 10-year Treasury notes (T-note) and Moody’s seasoned Baa corporate bonds. Using average monthly yields for these instruments and contemporaneous monthly closes of the S&P 500 Index for April 1953 through February 2012 (707 months), we find that: More…