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A “Triple Whammy” of Poor Economic Data Reports

A “triple whammy” of disappointing economic data reports hit the newswires today.  Poor reading on private job creation, housing and manufacturing data led to an about-face in the stock as investors are seemingly starting to now question the strength and sustainability of the economic recovery in the U.S.

Housing

Of the three economic data reports cited above, the S&P/Case-Shiller® Home Price index report, which shows the year over year percentage price change in housing for 10 and 20 major city indexes, was perhaps that most staggering.  Data released by Standard & Poor’s (S&P) on May 31, 2011, showed that the Index declined by 4.2% for the first quarter of 2011, following a 3.6% decline experienced over the course of the fourth quarter of 2010.  Further, 19 of the 20 major cities covered by the index were lower on a year-over-year basis as of March 2011.  In case you were wondering, Washington was the one major city that did not experience a decline over this timeframe.  Overall, national average home prices are now back to the levels recorded back in 2002.

 

The report led David M. Blitzer, Chairman of the Index Committee at S&P Indices to state in a S&P Indices May 31, 2011 Press Release that, “This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation. The National Index, the 20-City Composite and 12 MSAs all hit new lows with data reported through March 2011. The National Index fell 4.2% over the first quarter alone, and is down 5.1% compared to its year-ago level. Home prices continue on their downward spiral with no relief in sight.”

 

Jobs

The Automatic Data Processing (ADP) National Employment report that was released on May 31, 2011, showed that just 38,000 new private sector, non-farm jobs were added in May.  To put this into context, the analyst consensus estimate was for 175,000 new job creations in May – which was already well below the 244,000 new jobs that were reported as being created in April.  While any net new job creations are positive, couple the declining number of new job creations with the increasing trend of unemployment claim filings and one can see a job market that is becoming more dubious than many were expecting at this stage of the economic recovery.

With this said, we, at Hennion & Walsh, also tend to place value in the government’s Bureau of Labor Statistics (BLS) Employment Situations report in comparison to the ADP report.  Since each report has its own pros and cons, it is our belief that to gain a broad view of the current employment picture in the U.S., both reports should be analyzed.  To help better understand the differences between these two job market indicators, we provide the following report information:

  • ADP National Employment Report – according to the ADP website, this report is sponsored by ADP, and was developed and is maintained by Macroeconomic Advisers, LLC. The report is a monthly measure of employment derived from an anonymous subset of roughly 500,000 U.S. business clients working across several covered industry sectors.  The report is generally issued on Wednesdays, two days prior to the Bureau of Labor Statistics Employment Situation Report.
  • BLS Employment Situations Report – according to the BLS website, this report is a monthly survey of about 140,000 businesses and government agencies, representing approximately 440,000 individual worksites, in order to provide detailed industry data on employment, hours, and earnings of workers on nonfarm payrolls.  The active CES sample includes approximately one-third of all nonfarm payroll workers. The sample-based estimates are adjusted each month by a statistical model designed to reduce a primary source of non-sampling error which is the inability of the sample to capture, on a timely basis, employment growth generated by new business formations.

We are anxious to review the results of this upcoming Friday’s BLS report to see if it confirms the same job creation concern that the ADP report created.

Manufacturing

Finally, the Institute for Supply Management (ISM) reported on June 1, 2011, that is manufacturing index fell to 53.5% in May of 2011, marking the biggest single month drop since 1984.   It also marked the lowest relative monthly reading of this key manufacturing indicator since October of 2009.

MANUFACTURING AT A GLANCE
MAY 2011

Index

Series
Index
May

Series
Index
April

Percentage
Point
Change

Direction

Rate
of
Change


Trend*
(Months)

PMI

53.5

60.4

-6.9

Growing

Slower

22

New Orders

51.0

61.7

-10.7

Growing

Slower

23

Production

54.0

63.8

-9.8

Growing

Slower

24

Employment

58.2

62.7

-4.5

Growing

Slower

20

Supplier Deliveries

55.7

60.2

-4.5

Slowing

Slower

24

Inventories

48.7

53.6

-4.9

Contracting

From Growing

1

Customers’ Inventories

39.5

40.5

-1.0

Too Low

Faster

26

Prices

76.5

85.5

-9.0

Increasing

Slower

23

Backlog of Orders

50.5

61.0

-10.5

Growing

Slower

5

Exports

55.0

62.0

-7.0

Growing

Slower

23

Imports

54.5

55.5

-1.0

Growing

Slower

21

OVERALL ECONOMY

Growing

Slower

24

Manufacturing Sector

Growing

Slower

22

Source:  Institute for Supply Management, “May 2011 Manufacturing ISM Report on Business”, June 1, 2011.  Past performance is not an indication of future results.

Such a significant decline calls into doubt how much steam the manufacturing sector has left in its economic recovery engine.

Conclusion

The apparent weakness in these three recent economic data reports serves as a reminder to us that the U.S. economic recovery still faces some strong headwinds, though none insurmountable over the longer term.  In our opinion, it also should serve as a reminder to investors of the importance in having a sound and robust asset allocation strategy in place within a diversified investment portfolio, incorporating a wide range of asset classes and sectors, given these uncertain, and often challenging, global markets.