Importance of Economic Indicators

It’s the third or fourth day of unfreezing in the credit markets, as reflected by lower interbank lending rates (i.e. LIBOR rates) and declining short term corporate borrowing rates (i.e. commercial paper yields). But those rates are still high and the thaw is coming at a painfully slow rate. Good companies are still having a tough time paying bills while running their businesses. Regardless, the global flood of government-backed money into banks has at least changed the direction of the credit crisis. Let’s hope it stays that way. We’ll keep an eye on this. Our other eye can now refocus on the big picture: the economy as a whole.

From Worse to Bad
Thanks to government intervention, the chances of avoiding Great Depression 2 have improved. Eventually, we may have to worry about inflation, tax, and federal budget implications of all this money flying around. For now, the most important thing is to keep roofs over as many peoples heads as possible and soup kitchen lines as short as possible.

So why the f*** did the Dow plummet 733 points or 8%?!?! Like I said in my Oct. 11 post, even if credit unfreezes, we still need to think about the underlying economy. And today we got the numbers on two key economic indicators: retail sales and the producer price index.

Retail Sales Figure
I've suggested that moving forward, “we won’t be buying as much as we used to.” I’m not qualified to quantify a decline, but my tone was pretty negative. Perhaps I was too bleak, but it turns out the opposite certainly wasn’t true. Today, the Commerce Department told us that September retail sales fell 1.2% month-over-month. That may sound like a small number, but let’s not forget how big the economy is. Let’s put it this way: if normal body temperature of 98.6 degrees rose by 1.2%, you have a slight fever of 99.8 degrees.

Nobody Likes Surprises
So, a 1.2% decline. What idiot wasn’t expecting a decline in retail sales? Well, an important survey of pretty smart economists revealed an expectation for 0.6% decline. That means the actual number was 0.6% (or 60 basis points) worse than the expected number. This is a big margin. What if Obama is ahead in the polls, but come November he loses the election. That would be unexpected, right? Well, when it comes to worse-than-expected economic data…

…the Stock Market Sells Off
Remember, stocks reflect expectations. Most would argue that weaker-than-expected retail sales caused much of today’s 733 point decline. Another chunk of that decline probably reflects a new expectation for worse-than-initially-expected economic data to come. In other words, expectations for the economy are deteriorating. And for those who believe we're in recession, weaker data means a deeper or prolonged recession.

If you can follow this logic, then you’re probably qualified to discuss the day-to-day swings in the stock markets at your next cocktail party.

More Cocktail Party-Talk
The Dow closed at 8,577 today. That’s 1.5% higher than Friday’s closing price of 8,451. Hmm. I might argue that people think America’s economic prospects look better today than they did Friday. But not as good as it did Monday when it closed at 9,387.

Whatever the case, these swings reflect uncertainty. And uncertainty translates to volatility. And there's still a lot of very uncertain data to come.

Look on the Bright Side
The Producer Price Index (an important measure of inflation) fell 0.4%, as expected. Why did they fall? Oil prices are down. At $73 per barrel today, oil is down 50% from its July 11 high of $147. That means all of the oil derivatives just got cheaper. These include gasoline, jet fuel (plane tickets), heating oil, plastic, and all kinds of chemicals. Things are getting cheaper. Enjoy.

One More Thing
Today’s retail sales metric reflects September performance. The Dow opened Oct. 1 at 10,847 and closed Oct. 15 at 8,577, down 21% in 15 days. If you have stocks in you 401k plan, that sucks. October has been a crappy month. At the end of the month, how much do you think retail sales will have fallen?