Around the beginning of each month there are several reports released, which give some perspective on how the economy performed the prior month. In recent years this data has frequently been mixed, but the November data did show consistently solid readings.
The first reports I will discuss are ones that many people are not very familiar with. These come from the Institute of Supply Management (ISM), which surveys purchasing managers on the trend of business conditions for their respective companies. These reports are important because in addition to focusing on what consumer are doing, it is useful to know what is going on with businesses.
The ISM reports consist of one for manufacturing, and the other is for services. The numbers reported are typically in a range from 40 to 60, with 50 being a neutral reading. In essence reports above 50 indicate expansion, and less than 50 signal contraction.
For the month of November, the manufacturing reading was 57.3, which was the best monthly report this year. The services number was 53.9, which was a modest decline from the prior month, but still respectable.
The next report that I feel is of significance, would be the monthly auto sales data. Auto sales give an excellent read of the economy, since it is a major purchase, which can oftentimes be deferred. While the age of cars on the road is important in determining expected demand, most people don’t wait till their car is ready for the scrap heap before purchasing a new one.
For the month of November annualized auto sales were 16.4 million units. This was the best monthly reading since February of 2007. In addition, there were not any unusual incentives offered during November, as discounts were similar to prior months.
The final piece of data, which receives the most press, is the monthly employment report. This report consists of two surveys, one for businesses and the other for households. The household survey is used to calculate the unemployment rate, while the business survey is used to determine the net number of jobs created.
Of the two surveys economists and most investment professionals focus more on the survey for businesses. That is because it is more comprehensive than the household survey, and doesn’t jump around as much every month. The household survey calculating the unemployment rate is important, but you need at least several months of data to determine a trend.
For the month of November there were 203,000 jobs created, and the average for the past three months including November was 193,000. Also, 200,000 jobs created per month is a significant improvement from the pace of 100,000 to 150,000 job gains earlier in the year. In addition the unemployment rate in November dropped to 7 percent from 7.3 percent.
While the employment data is clearly better, we are still far from having a healthy labor market. A 5 percent unemployment rate is considered normal, so clearly 7 percent is definitely high. In California, which is seeing improvement, we still have one of the highest unemployment rates in the country.
As many of you are aware, this economic recovery has been very modest. It does appear with this recent data, that we are starting to experience a phase of somewhat stronger growth.
Assuming this trend continues, the Federal Reserve will ultimately change its direction. This means the policy of zero short-term interest rates will eventually come to an end. To some extent this is already reflected in the bond market, as longer term interest rates have risen this year.
The stock market has gained this year in part due to money coming out of bond funds into stocks. A stronger economy tends to be better for stocks versus bonds. However, with the stock market up strongly this year I would be cautious about being too aggressive adding new money to the market.
Allen Wisniewski has been involved in finance for more than two decades. He lives in Culver City with his family.
