There are lagging indicators and forward indicators. The lagging indicators are unemployment, jobless claims, GDP, etc…and the forward looking indicators are ISM, consumer confidence, building permits etc. The rule of thumb is an ISM reading of over 50 is an expanding economy, and under 50 is a contracting economy. The last week and a half we have had the joy of receiving a bevy of economic data that should have indicated where our economy stands.
Let’s start with the lagging indicators, the GDP report for second quarter was better than expected at a 1.7% growth in the economy (1% was expected). Wall street loves better than expected numbers and the markets reacted positively. However, the revisions to first quarter’s GDP, from the original 2.4% to a final reading of 1.1%, does not bode well for the revisions coming for second quarter. Payrolls came in worse than expected at 162,000 new jobs created, but the unemployment came in at a better than expected at 7.4% rate. This does not make sense until one looks further into the data and realizes that almost a million people left the workforce. We are now at the lowest employment participation rate our country has ever seen. The job report also tells us there is a structural shift in employment from full-time to part-time work as income growths are stagnant, as well as hours worked. Pending home sales also dropped a little bit.
The forward (leading) indicators like ISM manufacturing numbers came in at 55.4% which was much better than expected. Also the ISM Non-manufacturing came in at 56, which was a big surprise to the upside. Consumer confidence came in at 80.3 which was lower than expected, but near a multi-year high.
So how does one decipher all the data? The lagging indicators were not great, with the exception of the first estimate of 2nd quarter GDP, but as we have stated above, it is a recap of what has occurred. The leading indicators were all strong, and are predictors of what will potentially happen. We believe that one should look at where the economy is going, not where it has been, as more of an accurate predictor. The market move up has predicted the recent round of numbers, but Granite Group would argue that a lot of the short-term good is already in the market valuation. We believe 2014 could hold on to some of the 2013 gains, but most certainly not at the increases we have seen so far in 2013.