This week we wrap up our series on “the data” and dive into labor, manufacturing, and retail data. While there is no real theme to this group of data points, they help paint a complete picture of the economy. I use them to confirm the thesis I already formed about the economy and stock market.
(In case you missed it, I have previously covered: economic data, manufacturing reports, housing market data, Federal Reserve reports, and sentiment data.)
Labor, manufacturing, and retail data
The labor market
Let’s start with the labor market. In my first blog post in the series, I discussed the non-farm payroll report, a monthly estimate of public and private job growth. Yet, we should also consider productivity, unit labor costs, and the employment cost index.
Productivity is one of my favorite data points. How productive is the labor force? How much is being produced? What is the rate of change? Higher productivity means growth is organic and not driven by higher prices or inflation; this is what we like to see. If productivity is high and driving growth in the economy, the Federal Reserve will not raise interest rates much to cool off a hot economy – a positive for the stock market.
Unit labor costs is the total amount a business pays in employee compensation to produce a single unit of output. It is derived by dividing labor compensation by labor productivity (per hour). High unit labor costs can act as a driver of inflation.
The employment cost index provides us with another view of costs; it measures the cost of hourly wages for employers over time (monthly and quarterly).
Manufacturing data
Manufacturing used to be a huge part of the economy, but today it is only about 10%. For a $33 trillion economy, that equals a large chunk of change.
Industrial production and capacity utilization are important metrics that are published monthly by the Federal Reserve. Industrial production tells us the inflation-adjusted output of factories, mines, electric utilities, and gas utilities in the US. Naturally, I like to see steady growth here.
Capacity utilization tells us the sustainable maximum output, or the highest level that can be achieved over time without any consideration to down time. Moderate utilization is the sweet spot. High utilization is a warning sign of potential shortages and/or inflation.
Retail sales
Lastly, we look at retail sales, which covers far more than clothes shopping. It includes consumer spending across the spectrum: gas stations, furniture stores, food service, building materials, etc. This monthly report is critical, as our economy is 70% driven by consumers.
Some reports exclude the core group of food and energy, thus isolating discretionary spending.
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If you read this entire series, you can see how many data points go into understanding the state of the US economy. They have been critical to guiding my trading for decades, and I hope you find them just as helpful as I have.
10-day series for beginners
