Economic Data Isn’t Adding Up

Jobless claims drop 21,000! What does that mean? Analyst view: Fresh evidence that layoffs remain low and the pace of hiring in the US is still growing. Rest of the story: 58,000 climb in continuing claims to a seasonally adjusted number of 2.43 million. The claims reflect the number of people already receiving regular unemployment checks. However, they don’t take into account those who have exhausted their benefits or those who have stopped looking for a job. What does this have to do with money and investing? Everything and nothing! It is a matter of how we apply it to any investment strategy we are attempting to deploy. If I were writing about politics we could twist this data to whatever view we want to promote… remember statistics don’t lie, only statisticians. But, I am focused on money and how to generate gains from investing my money… for me jobs are all about money flow. I get a job, my employer pays me, withholds taxes for the government, social security for the retired and medicare for healthcare benefits to those over 65. I first save 10% in my 401k to be invested and take the rest home to spend. Simply put, jobs are about stimulating the commerce of America.

That said, the two views expressed above offer a look into what is good about more jobs/hiring; more money flow. What is bad about rising continuing claims, less money flow. Those receiving benefits have some money flow, but obviously not enough. Those who have quit looking… must be living off of saving or receive other welfare benefits from the government… reverse money flow. Putting this data in perspective helps me understand why GDP growth is flat. Without growth in money flow from jobs and wages commerce suffers or growth becomes stagnant. If government spending drops along with these areas it puts more pressure on commerce. Adding it all up  and you see why corporate earnings growth has slowed the last three quarters. If we add in the estimates for first quarter earnings growth at zero you get the picture of why the markets may be working on borrowed time.

The Philly Fed index slowed to 5.2 in February and well below the expected 8 in the forecast. This supports the data from the Empire state index which fell to 7.8 missing forecasts as well. Again what does it mean? Simple version is manufacturing in these regions are slowing. If we are producing less, we are selling less and again we are back to the money flow issue. Both indexes are believed to give some indication of what the direction of the ISM manufacturing report will take, it is issued monthly based on the national manufacturing growth or decline. One additional input for the manufacturing sector is a stronger dollar. Manufacturing is top-heavy on the exporting side, and a stronger dollar will cool the pace of growth due to the highest currency cost. Let’s just go with the simple view… less cash flow in the manufacturing sector in January equals slowing money flow in the economy.

US leading economic indicators rose in January, up 0.2% pace, but that is half the 0.4% rate in December. Back to, what does it mean? Since it is a survey, it suggests that the outlook for positive (above zero) short-term growth in 2015 is slowing or as the headlines might say… moderating. The report shows a lack of momentum in residential construction, weaker outlook for new orders in manufacturing (see above), and poses a downside risk for the US economy. Again, slower money flow impacts growth in the commerce of America.

Last, and certainly not least, Americans aren’t shopping or spending like they believe the economy is healthy and growing. Retail sales fell for the second month in January. Some estimates believe the consumer will pick up the slack from the manufacturing sector for money flow in the economy… based on the declines the last two months that doesn’t seem to be adding up. Should I be so bold as to suggest healthcare costs are rising? Or maybe the cost in housing is influencing the spending side? One area where spending has increased in restaurants. A look at the index shows the last thirteen months has been on a steady climb for stock prices. Thus, money flow is positive… stock prices are positive. Gasoline prices dropping has helped free-cash-flow,  but that is not making it’s way to the retailers… at least not according to the data. Jobs and wages are still greatest contributor to retail spending and with wages stagnant and new jobs being added at the lower end of the wage scale the money flow has not shown up in the retail data… at least yet. Again, slower money flow impacts the growth in commerce.

I am not in the business of prophecy only investing based on my beliefs. My beliefs tell me it is time to be cautious about the advancement of the broader market indexes. I am not selling my positions, I am not running in the streets calling for the end of the world as we know it economically. I am not yelling to buy gold, silver, guns, ammo or any other fear mongering asset. All I am saying is you are in control of your money’s destiny… protect it wisely. Use stops, hedge, whatever strategy keeps your money out of harms way should the data all add up to selling in the broad market indexes. Know one knows when the lack of money flow will show up in the price of stocks.