Purchasing Managers Index (PMI)

By Ryan Barnes

Release Date:	The first business day of the month
Release Time:	10am Eastern Standard Time
Coverage:	Previous month's data
Released By:	Institute for Supply Management (ISM)
Latest Release:	http://www.ism.ws/ISMReport/

Background
The Institute for Supply Management (ISM) has is responsible for maintaining the Purchasing Managers Index (PMI), which is the headline indicator in the monthly ISM Report on Business.The ISM is a non-profit group boasting more than 40,000 members engaged in the supply management and purchasing professions.

The PMI is a composite index of five "sub-indicators", which are extracted through surveys to more than 400 purchasing managers from around the country, chosen for their geographic and industry diversification benefits. The five sub-indexes are given a weighting, as follows:

• Production level (.25)
• New orders (from customers) (.30)
• Supplier deliveries - (are they coming faster or slower?) (.15)
• Inventories (.10)
• Employment level (.20)

A diffusion process is done to the survey answers, which come in only three options; managers can either respond with "better", "same", or "worse" to the questions about the industry as they see it. The resulting PMI figure (which can be from 0 to 100) is calculated by taking the percentage of respondents that reported better conditions than the previous month and adding to that total half of the percentage of respondents that reported no change in conditions. For example, a PMI reading of 50 would indicate an equal number of respondents reporting "better conditions" and "worse conditions".

What it Means for Investors
PMI is a very important sentiment reading, not only for manufacturing, but also the economy as a whole. Although U.S. manufacturing is not the huge component of total gross domestic product (GDP) that it once was, this industry is still where recessions tend to begin and end. For this reason, the PMI is very closely watched, setting the tone for the upcoming month and other indicator releases.

The magic number for the PMI is 50. A reading of 50 or higher generally indicates that the industry is expanding. If manufacturing is expanding, the general economy should be doing likewise. As such, it is considered a good indicator of future GDP levels. Many economists will adjust their GDP estimates after reading the PMI report. Another useful figure to remember is 42. An index level higher than 42%, over time, is considered the benchmark for economic (GDP) expansion. The different levels between 42 and 50 speak to the strength of that expansion. If the number falls below 42%, recession could be just around the corner.

As with many other indicators, the rate of change from month to month is vital. A reading of 51 (expanding manufacturing industry) coming after a month with a reading of 56 would not be seen favorably by the markets, especially if the economy had been showing solid growth previously.

The PMI can be considered a hybrid indicator in that is has actual data elements but also a confidence element, like the Consumer Confidence Index. Answers are subjective, and may not always relate to events as much as perceptions. Both can have value to investors looking to get a sense of actual experiences as well as see the PMI index level itself.

Bond markets may look more intently at the growth in supplier deliveries and prices paid areas of the report, as these have been historical pivot points for inflationary concerns. Bond markets will usually move in advance of an anticipated interest rate move, sending yields lower if rate cuts are expected and vice versa.

PMI is considered a leading indicator in the eyes of the Fed, as evidenced by its mention in the FOMC minutes that are publicly released after its closed-door meetings. The supplier deliveries component itself is an official variable in calculating the Conference Board's U.S. Leading Index.

There are regional purchasing manager reports, some of which come out earlier than the PMI for a given month, but the PMI is the only national indicator.

Strengths:

• Very timely, coming out on the first day of the month following the survey month
• A good predictor of future releases, such as GDP and the Bureau of Labor Statistics (BLS) manufacturing reports
• Anecdotal remarks within the release can provide a more complete perspective from actual professionals (like in the Beige Book).
• Report displays point changes from the previous report, along with the length in months of any long-term trends shown for the "sub-indicators", such as inventories or prices.
• Commodities, such as silver, steel and copper are reported individually regarding the supply tightness and price levels noted in the previous month.

Weaknesses:

• Only covers manufacturing sector - the PMI Non-Manufacturing Business Report covers many other industries in the same manner
• Survey is very subjective in its data retrieval compared to other indicators.
• Regional reports released earlier (Philly Fed, Chicago NAPM) may have high correlations and can take some of the steam out of this release.

The Closing Line
The PMI is a uniquely constructed, timely indicator with a lot of value on Wall Street.

It is most useful when taken in context with more data-driven indicators, such as the Producer Price Index and GDP, or in conjunction with the ISM Report Non-Manufacturing Report on Business.

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Retail Sales Report

By Ryan Barnes

Release Date:	On or around the 13th of the month
Release Time:	8:30am Eastern Standard Time
Coverage:	Previous month's data
Released By:	Census Bureau and the U.S. Department of Commerce
Latest Release:	http://www.census.gov/svsd/www/advtable.html

Background
Retail Sales is very closely watched by both economists and investors. This indicator tracks the dollar value of merchandise sold within the retail trade by taking a sampling of companies engaged in the business of selling end products to consumers. Both fixed point-of-sale businesses and non-store retailers (such as mail catalogs and vending machines) are used in the data sample. Companies of all sizes are used in the survey, from Wal-Mart to independent, small-town businesses.

The data released will cover the prior month's sales, making it a timely indicator of not only the performance of this important industry (consumer expenditures generally make up about two-thirds of total gross domestic product), but of price level activity as a whole. Retail Sales is considered a coincident indicator, in that activity reflects the current state of the economy. It is also considered a vital pre-inflationary indicator, which creates the biggest interest from Wall Street watchers and the Conference Review Board,which tracks data for the Federal Reserve Board's directors.

The release will contain two components: a total sales figure (and related % change from the previous month), and one "ex-autos", as the large ticket price and historical seasonality of auto sales can throw off the total figure disproportionately.

What it Means for Investors
The release of the Retail Sales Report can cause above-average volatility in the stock market. Its clarity as a predictor of inflationary pressure can cause investors to rethink the likelihood of Fed rate cuts or hikes, depending on the direction of the underlying trend. For example, a sharp rise in retail sales in the middle of the business cycle may be followed by a short-term hike in interest rates by the Fed in the hope of curbing possible inflation. This would cause investors to sell bonds (causing yields to rise), and could pose problems for stocks as well, as inflation causes decreased future cash flows for companies.

If retail sales growth is stalled or slowing, this means consumers are not spending at previous levels, and could signal a recession due to the significant role personal consumption plays in the health of the economy.

One of the most important factors investors should note when viewing the indicator is how far off the reported figure is from the so-called consensus number, or "street number". In general, the stock market does not like surprises, so a figure that is higher than expected, even when the economy is humming along well, could trigger selling of stocks and bonds, as inflationary fears would be deemed higher than expected.

Retail companies themselves can be especially volatile with the release of this widely read industry report. The release data will show the sales performance of all the component sectors within retail (such as electronics retailers and restaurants), allowing investors to peek in on relative "pockets of strength" within the overall figures. An investor holding stocks in retail can see how his or her holdings are performing relative to the sector as a whole - a valuable analysis regardless of overall market conditions.

Strengths:

• The retail sales data is extremely timely, and is released only two weeks after the month it covers.
• The data release is robust; investors can download a full breakout of component sectors, as well as spreadsheet historical data to examine trends.
• Retail sales reports get a lot of press. It's an indicator that is easy to understand and relates closely to the average consumer.
• A revised report comes out later (two to three months on average), amending any errors.
• Analysts and economists will take out volatile components to show the more underlying demand patterns. The most volatile components are autos, gas prices and food prices.
• Data is adjusted seasonally, monthly and for holiday differences month to month.

Weaknesses:

• Revisions to the report (released about two months after the advance report) can be quite large, and the sample size is relatively small compared to the number of retailers opening their doors to consumers.
• Retail sales data is often volatile from month to month, which makes trend-spotting difficult.
• The indicator is based on dollars spent and does not account for inflation. This makes it difficult for individual investors to make decisions based on the raw data.
• Does not account for retail services, only physical merchandise. The U.S. is an increasingly service-based economy, so not all retail "activity" is captured.

The Closing Line
Retail Sales is one of the big ones - a report that can shed a lot of light on the economy. It provides detailed industry information and can really move the market. Investors will best be served by waiting for the analysts to sort through the report, removing any overly volatile components, and drawing conclusions from there. For owners of individual retail stocks, look at the sector growth rates to determine the relative performance of individual stocks held in a particular sector.

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Personal Income and Outlays

By Ryan Barnes

Release Date:	4-5 weeks after month's end
Release Time:	8:30am Eastern Standard Time
Coverage:	Previous month
Released By:	Bureau of Economic Analysis (BEA)
Latest Release:	http://bea.gov/bea/newsrel/pinewsrelease.htm

Background
The Personal Income and Outlays Report (sometimes called the Personal Consumption Report) is issued by the Bureau of Economic Analysis (BEA) monthly. The report contains two sections, which together provide insight into consumer behavior and total economic consumption. The first section deals with personal income, while the other deals with personal outlays.

Personal income is a measure of income received from wages and salaries, dividends and interest, rental income, and the like. All are measured in actual dollars and usually expressed in percentage terms. Wages and salaries are the dominant contributor to the aggregate total.

Personal outlays is made up of mostly personal consumption on goods and services, but also includes interest payments made on non-mortgage debt and transfer payments to government or social services.

From these two basic variables a bit of math is done to derive:

• Real Personal Income: Personal income per capita (using population figures), and adjusted for inflation
• Disposable Personal Income (DPI): Personal income minus tax payments
• Personal Savings Rate: DPI minus personal outlays (and expressed as a percentage of DPI)

Personal consumption expenditures (PCE) deal with the other side of the consumer equation, mainly how much people are spending. PCE counts consumer spending for things such as retail items, but also how much people are spending on credit card interest payments. PCE measures also deduct the dollars spent by consumers on things like social security withholding and pension payments made by the self-employed.

PCE data is also expressed as a chain-weighted index. This means that results from each period are linked to others to produce an index level that takes into account such behavior as substitution of goods when prices rise. The PCE Index is a large component of the Conference Board's Index of Coincident Indicators,and is also used to calculate real gross domestic product (GDP).

Each release will show results for each month in the year-to-date, as well as annually for the previous three years. Personal income is broken down by general sector (manufacturing, services, government, etc), while personal consumption is divided among durables, non-durables and services.

What it Means for Investors
Personal income figures have shown to be the biggest determinant of future consumer demand. If people have more disposable income, they will generally spend more money. If this is not the case, an increase in the savings rate will occur. The U.S. has shown very low savings rates for many years now, even showing a slightly negative rate in recent years.

The Fed has also anointed the core PCE Index (with food and energy removed) as one of its favorite inflation indicators, some preferring it to even the Consumer Price Index (CPI). However, because the CPI will be released prior to this report, there is rarely much overall surprise and, therefore, little market reaction to the PCE index.

One important thing that is excluded from the personal income figures are capital gains, as from the sale of appreciated stock. In the past decade, there has been a lot of wealth created in the stock market for many investors. While there are no official measurements of it, capital gains represent a source of disposable income for many and, as such, the personal income figures are known to be incomplete.

Strengths

• The chain-weighted PCE Index is considered a valuable longer term price indicator.
• PCE represents the largest portion of GDP.
• Savings rates highlight the potential future spending power of consumers.

Weaknesses:

• Released after many other indicators in the month, reducing its timeliness
• Not all sources of consumer income are included
• No extensive industry or demographic breakdowns

The Closing Line
The Personal Consumption Report is most useful as a predictor of overall consumer demand and the ability for people to spend more in the future through higher levels of disposable income. PCE represents the largest component of real gross domestic product.

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