Importance (A-F): This release merits a B-.
Source: The University of Michigan.
Release Time: Preliminary: 10:00 ET on the second Friday of the month (data for current month); Final: 10:00 ET on the fourth Friday of the month (data for current month).
The Michigan index is almost identical to the Conference Board Consumer Confidence index, though there are two monthly releases, a preliminary and final reading. Like the Conference Board index, it has two subindices - expectations and current conditions. The expectations index is a component of the Conference Board's Leading Indicators index.
14 abr 2010
Treasury Budget
Importance (A-F): This release merits a D.
Source: U.S. Treasury Department.
Release Time: 14:00 ET, about the third week of the month for the prior month.
Raw Data Available At: www.treas.gov
In Brief
The monthly Treasury budget data follow strong seasonal patterns which produce huge month-to-month fluctuations in the deficit. These fluctuations tell us little about long term budget trends. To the extent that the market analyses the monthly Treasury data, the focus is on year/year changes in receipts and outlays, since the data are not seasonally adjusted. Only in April, the most important month for tax inflows to the Treasury, does the market pay any attention to this report. The data can be predicted with reasonable accuracy by using daily data in the Daily Treasury Statement.
In Depth
The President's Budget
The annual budget process begins in late January or early February with the presentation of the President's budget for the coming fiscal year. The President's proposals serve as an outline for Congress, particularly when the White House and Congress are controlled by the same party. In the 1980s, the conflicting agendas of the President and Congress often resulted in a final budget which bore little resemblance to the President's budget. After a quiet budget year in 1994 when Democrats controlled Congress and the White House, the Republican takeover of the House and Senate has produced more contentious budget battles in 1995 and 1996.
One of the most common misperceptions about the budget process is that the annual budgeting actually covers all federal spending. Though the President's proposed budget will include projections for all federal government outlays, less than half of all spending is actually controlled by the annual budget legislation. Roughly 67% of federal outlays are mandated by "permanent" law. Unless these laws are changed, no legislative review of spending programs funded by permanent law is required in the appropriations process. The same is true of federal receipts, where permanent law does not require annual review of taxation.
Permanent law should not by any means be construed as suggesting true permanence. Permanent laws are changed frequently, with the 1990 and 1993 budget deals being the most recent examples. These recent efforts to reduce the deficit have incorporated both changes in discretionary spending and changes in permanent laws affecting taxes and spending. Such deficit reduction efforts are usually packaged into a so-called Omnibus Budget Reconciliation Act (OBRA). In the absence of these comprehensive deficit reduction efforts, the annual budget review will only deal with discretionary spending which makes up roughly 33% of the budget. It is perhaps one of the better kept secrets in Washington that the annual budget review which seems at the core of the democratic process does not in fact review even half of all federal spending.
The Budget Resolution
Once the President has submitted his budget to Congress, the legislative process begins. Within six weeks of the date that the President presents his budget, each Congressional committee must report to the House and Senate Budget Committees regarding budget estimates for programs overseen by their committee. The Budget Committees then approve a budget resolution based on these estimates. After full House and Senate approval of these resolutions, any differences between the House and Senate versions are worked out in conference committee and then a final resolution is approved by each house. This process is scheduled to be completed by April 15, but is often delayed, as was the case this year. As the budget resolution is only a blueprint for the budget and not actual legislation, it does not require presidential approval.
Appropriations Bills
The real job of budgeting begins after the budget resolution is adopted. The appropriations process is when actual budget authority for discretionary programs is legislated. We have already noted that annual budgeting only covers discretionary programs, which are responsible for just 33% of total spending. Even these discretionary programs are not bundled into one budget package. The annual budget for discretionary spending is actually comprised of 13 separate appropriations bills. The House and Senate Appropriations Committees each include 13 subcommittees which are responsible for the 13 bills. The 13 subcommittees are listed below.
Subcommittees of the House and Senate Appropriations Committees
Agriculture
Commerce, Justice
Defense
District of Columbia
Energy, Water Foreign Operations
Interior
Labor, Health
Legislative Military Construction
Transportation
Treasury, Postal Service
Veterans, HUD, Agencies
As all tax and spending bills must originate in the House, the House Appropriations subcommittees will see the first action in the appropriations process. The 13 bills are crafted individually and do not work their way through the House and Senate on the same timetable. The goal is of course to complete legislation on all 13 bills by the beginning of the fiscal year on October 1. Yet these bills proceed and are approved of on their own, and are not packaged into one comprehensive bill known simply as the budget.
Once a House Appropriations subcommittee approves its bill, the legislation proceeds to the full Committee and then to the House floor. Approval by the House sets in motion the same process in the Senate. Upon approval by the full Senate, differences between the House and Senate versions of the bill are reconciled in conference committee and then a final version of the bill is sent back to the House and Senate floors. Presidential approval of each of the 13 appropriations bills completes the process. When work on the 13 bills is delayed past the start of the fiscal year, Congress and the President must approve of continuing resolutions which fund government programs at the prior year's level until the relevant appropriations bill is signed into law.
One final note about the appropriations process is that the appropriations bills do not set actual outlays for the coming fiscal year, but instead legislate "budget authority." The Office of Management and Budget (OMB) defines budget authority as "the authority to incur legally binding obligations of the Government that will result in immediate or future outlays." Actual outlays may exceed or fall short of budget authority in any given year depending on past budget authority and the duration of a program.
Omnibus Budget Reconciliation Act
In years such as 1985, 1987, 1990, and 1993, Congress has enacted legislation aimed at long term deficit reduction. These legislative efforts occur separately from the annual appropriations process. They may change permanent laws and set caps which affect discretionary spending, but the regular budget process will nevertheless be unchanged. OBRA legislation affects permanent law and is not a substitute for annual budgets. OBRA legislation packages changes in permanent laws which will typically affect both taxation and mandatory spending. The legislative process for OBRA is completely different than the appropriations process. Legislation is still initiated in the House, but is not limited to work by the Appropriations Committee. The House Ways and Means Committee oversees tax law, and thus plays a critical role in OBRA legislation, as does its Senate counterpart, the Finance Committee. Legislation affecting entitlement programs also falls under the jurisdiction of committees other than Appropriations, i.e. proposed Medicare changes would be considered by a House Ways and Means subcommittee on health care.
Supplemental Appropriations
The 13 appropriations bills are not necessarily the last word for the year on federal spending. Supplemental appropriations bills may be approved at any time to provide additional funding for government programs. Tight caps on discretionary spending set by the 1990 and 1993 budget acts require a pay-as-you-go approach to such funding, thus limiting the number of supplemental appropriations. "Emergency" spending circumvents the pay-as-you-go mandate, however, allowing for a variety of supplemental appropriations. Past "emergencies" have covered everything from the Gulf War to extended unemployment insurance to natural disaster relief.
Source: U.S. Treasury Department.
Release Time: 14:00 ET, about the third week of the month for the prior month.
Raw Data Available At: www.treas.gov
In Brief
The monthly Treasury budget data follow strong seasonal patterns which produce huge month-to-month fluctuations in the deficit. These fluctuations tell us little about long term budget trends. To the extent that the market analyses the monthly Treasury data, the focus is on year/year changes in receipts and outlays, since the data are not seasonally adjusted. Only in April, the most important month for tax inflows to the Treasury, does the market pay any attention to this report. The data can be predicted with reasonable accuracy by using daily data in the Daily Treasury Statement.
In Depth
The President's Budget
The annual budget process begins in late January or early February with the presentation of the President's budget for the coming fiscal year. The President's proposals serve as an outline for Congress, particularly when the White House and Congress are controlled by the same party. In the 1980s, the conflicting agendas of the President and Congress often resulted in a final budget which bore little resemblance to the President's budget. After a quiet budget year in 1994 when Democrats controlled Congress and the White House, the Republican takeover of the House and Senate has produced more contentious budget battles in 1995 and 1996.
One of the most common misperceptions about the budget process is that the annual budgeting actually covers all federal spending. Though the President's proposed budget will include projections for all federal government outlays, less than half of all spending is actually controlled by the annual budget legislation. Roughly 67% of federal outlays are mandated by "permanent" law. Unless these laws are changed, no legislative review of spending programs funded by permanent law is required in the appropriations process. The same is true of federal receipts, where permanent law does not require annual review of taxation.
Permanent law should not by any means be construed as suggesting true permanence. Permanent laws are changed frequently, with the 1990 and 1993 budget deals being the most recent examples. These recent efforts to reduce the deficit have incorporated both changes in discretionary spending and changes in permanent laws affecting taxes and spending. Such deficit reduction efforts are usually packaged into a so-called Omnibus Budget Reconciliation Act (OBRA). In the absence of these comprehensive deficit reduction efforts, the annual budget review will only deal with discretionary spending which makes up roughly 33% of the budget. It is perhaps one of the better kept secrets in Washington that the annual budget review which seems at the core of the democratic process does not in fact review even half of all federal spending.
The Budget Resolution
Once the President has submitted his budget to Congress, the legislative process begins. Within six weeks of the date that the President presents his budget, each Congressional committee must report to the House and Senate Budget Committees regarding budget estimates for programs overseen by their committee. The Budget Committees then approve a budget resolution based on these estimates. After full House and Senate approval of these resolutions, any differences between the House and Senate versions are worked out in conference committee and then a final resolution is approved by each house. This process is scheduled to be completed by April 15, but is often delayed, as was the case this year. As the budget resolution is only a blueprint for the budget and not actual legislation, it does not require presidential approval.
Appropriations Bills
The real job of budgeting begins after the budget resolution is adopted. The appropriations process is when actual budget authority for discretionary programs is legislated. We have already noted that annual budgeting only covers discretionary programs, which are responsible for just 33% of total spending. Even these discretionary programs are not bundled into one budget package. The annual budget for discretionary spending is actually comprised of 13 separate appropriations bills. The House and Senate Appropriations Committees each include 13 subcommittees which are responsible for the 13 bills. The 13 subcommittees are listed below.
Subcommittees of the House and Senate Appropriations Committees
Agriculture
Commerce, Justice
Defense
District of Columbia
Energy, Water Foreign Operations
Interior
Labor, Health
Legislative Military Construction
Transportation
Treasury, Postal Service
Veterans, HUD, Agencies
As all tax and spending bills must originate in the House, the House Appropriations subcommittees will see the first action in the appropriations process. The 13 bills are crafted individually and do not work their way through the House and Senate on the same timetable. The goal is of course to complete legislation on all 13 bills by the beginning of the fiscal year on October 1. Yet these bills proceed and are approved of on their own, and are not packaged into one comprehensive bill known simply as the budget.
Once a House Appropriations subcommittee approves its bill, the legislation proceeds to the full Committee and then to the House floor. Approval by the House sets in motion the same process in the Senate. Upon approval by the full Senate, differences between the House and Senate versions of the bill are reconciled in conference committee and then a final version of the bill is sent back to the House and Senate floors. Presidential approval of each of the 13 appropriations bills completes the process. When work on the 13 bills is delayed past the start of the fiscal year, Congress and the President must approve of continuing resolutions which fund government programs at the prior year's level until the relevant appropriations bill is signed into law.
One final note about the appropriations process is that the appropriations bills do not set actual outlays for the coming fiscal year, but instead legislate "budget authority." The Office of Management and Budget (OMB) defines budget authority as "the authority to incur legally binding obligations of the Government that will result in immediate or future outlays." Actual outlays may exceed or fall short of budget authority in any given year depending on past budget authority and the duration of a program.
Omnibus Budget Reconciliation Act
In years such as 1985, 1987, 1990, and 1993, Congress has enacted legislation aimed at long term deficit reduction. These legislative efforts occur separately from the annual appropriations process. They may change permanent laws and set caps which affect discretionary spending, but the regular budget process will nevertheless be unchanged. OBRA legislation affects permanent law and is not a substitute for annual budgets. OBRA legislation packages changes in permanent laws which will typically affect both taxation and mandatory spending. The legislative process for OBRA is completely different than the appropriations process. Legislation is still initiated in the House, but is not limited to work by the Appropriations Committee. The House Ways and Means Committee oversees tax law, and thus plays a critical role in OBRA legislation, as does its Senate counterpart, the Finance Committee. Legislation affecting entitlement programs also falls under the jurisdiction of committees other than Appropriations, i.e. proposed Medicare changes would be considered by a House Ways and Means subcommittee on health care.
Supplemental Appropriations
The 13 appropriations bills are not necessarily the last word for the year on federal spending. Supplemental appropriations bills may be approved at any time to provide additional funding for government programs. Tight caps on discretionary spending set by the 1990 and 1993 budget acts require a pay-as-you-go approach to such funding, thus limiting the number of supplemental appropriations. "Emergency" spending circumvents the pay-as-you-go mandate, however, allowing for a variety of supplemental appropriations. Past "emergencies" have covered everything from the Gulf War to extended unemployment insurance to natural disaster relief.
20 mar 2010
Employment Report
Importance (A-F): This release merits an A.
Source: Bureau of Labor Statistics, U.S. Department of Labor.
Release Time: First Friday of the month at 8:30 ET for the prior month
Raw Data Available At: www.bls.gov
In Brief
The employment report is actually two separate reports which are the results of two separate surveys. The household survey is a survey of roughly 60,000 households. This survey produces the unemployment rate. The establishment survey is a survey of 375,000 businesses. This survey produces the nonfarm payrolls, average workweek, and average hourly earnings figures, to name a few. Both surveys cover the payroll period which includes the 12th of each month.
The reports both measure employment levels, just from different angles. Due to the vastly different size of the survey samples (the establishment survey not only surveys more businesses, but each business employs many individuals), the measures of employment may differ markedly from month to month. The household survey is used only for the unemployment measure - the market focusses primarily on the more comprehensive establishment survey. Together, these two surveys make up the employment report, the most timely and broad indicator of economic activity released each month.
Total payrolls are broken down into sectors such as manufacturing, mining, construction, services, and government. The markets follows these components closely as indicators of the trends in sectors of the economy; the manufacturing sector is watched the most closely as it often leads the business cycle. The data also include breakdowns of hours worked, overtime, and average hourly earnings.
The average workweek (also known as hours worked) is important for two reasons. First, it is a critical determinant of such monthly indicators as industrial production and personal income. Second, it is considered a useful indicator of labor market conditions: a rising workweek early in the business cycle may be the first indication that employers are preparing to boost their payrolls, while late in the cycle a rising workweek may indicate that employers are having difficulty finding qualified applicants for open positions. Average earnings are closely followed as an indicator of potential inflation. Like the price of any good or service, the price of labor reacts to an overly accommodative monetary policy. If the price of labor is rising sharply, it may be an indication that too much money is chasing too few goods, or in this case employees.
In Depth
The employment report is really two reports - the household survey and the establishment survey. These two surveys contain a wealth of timely information which justify this report's status as the most important economic release of the month. This same wealth of information can nevertheless turn into a dearth of knowledge if it is not placed in the proper context.
Household and Establishment Surveys
The household and establishment surveys differ due to the source of the data, as the names suggest. The household survey is a survey of households and the establishment survey is a surveys of businesses. The establishment survey, which is sometimes referred to as the payrolls survey, is favored by the market for a simple reason - it is far more comprehensive. Both surveys attempt to measure employment conditions at the roughly the same point in time - the household survey covers the calendar week which includes the 12th of the month while the establishment survey covers the pay period (be it a week, two weeks, or longer) which includes the 12th. But the establishment survey covers 390,000 businesses which employ 47 million people, while the household survey covers just 50,000 individuals. With a sample size which is 940 times larger than the household survey, it is hardly surprising that the market is more interested in the establishment survey.
Aside from the sample size, the surveys differ in other significant ways. The household survey counts farm workers, the self-employed, unpaid family workers, and private household workers as employed; the establishment survey does not. The household survey can only count one individual as employed once, even if that person holds two jobs. The establishment survey will double count an individual who appears on the payrolls of two companies. There are other, less significant differences, but let's turn now to the statistics produced by the two surveys.
The Establishment Survey
Nonfarm Payrolls
Without question, the single most important piece of data contained in the employment report generally and the establishment survey specifically is nonfarm payrolls. As the name implies, nonfarm payrolls measure the number of people on the payrolls of all non-agricultural businesses. The monthly changes in payrolls can be quite volatile, occasionally varying by better than 200K from one month to the next. Even with this volatility and the possibility of large revisions to past data, the payrolls figures offer the most timely and comprehensive snapshot of the economy.
Average Workweek
The workweek, also referred to as hours worked, is an often underrated indicator in the establishment survey. The average number of hours worked by employees on nonfarm payrolls is an important determinant of both industrial production and personal income in any given month. The workweek typically sees changes of a tenth or two each month, but can see much larger swings, such as the four tenth decline reported for October. To understand the importance of these changes in the workweek, note that a one tenth decline in the average workweek of 120 mln workers (roughly the current level of employment) results in 12 mln fewer hours worked. To create a similar decline in manhours through a change in employment, payrolls would have to fall 340K. For the purposes of production and income calculations, a one tenth of an hour change in the workweek is equivalent to a 340K change in employment. Needless to say, the workweek data are therefore critical in judging the overall strength or weakness of the employment report.
Aggregate Hours Worked
The aggregate hours worked index simply brings together the two series we just noted. By calculating an index which looks at both employment and the workweek, we get a complete picture of the total hours worked each month. This indicator is seen as a monthly proxy for GDP. By definition, the quarterly change in the amount of goods produced is equal to the change in manhours plus the change in productivity. As productivity is somewhat predictable from quarter to quarter, the aggregate hours worked index provides a helpful monthly read on the overall economy.
Average Hourly Earnings
The last indicator from the establishment survey which is worthy of close inspection is average hourly earnings, which is important for two reasons. Alongside total manhours, the average earnings figure gives us a good indication of personal income growth during the month. Second, the earnings figures are closely watched during periods of strong economic growth for evidence of increasing wage pressures. Such has certainly been the case over the past year, as the market's reaction to the employment data has often turned on the change in hourly earnings and its implications for the inflation outlook.
The Household Survey
The Unemployment Rate
As we noted earlier, the household survey is not nearly as reliable as the establishment survey due to the small size of the survey sample. This survey nevertheless receives attention, primarily because it is responsible for the one figure which is guaranteed to lead the nightly news - the unemployment rate. The unemployment rate demands little explanation, though it is worth noting that the rate can occasionally sees significant monthly changes which are due to flukes in the data. The rate is simply the result of dividing the number of people unemployed (labor force less employed) by the number of people in the labor force.
The problem is that the employment and labor force measures in the household survey are far more volatile than even nonfarm payrolls. The reason, of course, is the small survey sample size. It is therefore useful to look at the labor force and employment figures themselves to determine if changes in the unemployment rate are due to aberrant swings in one or both of these series.
Beyond the basics of tallying up the labor force and employment, the household survey breaks down these totals in every way imaginable - by gender, race, age, type of job, duration of unemployment, and on and on. These breakdowns seldom are of interest to the financial markets. Perhaps the only two exceptions are the discouraged worker and part-time worker measures.
Discouraged Workers
Discouraged workers are people who have dropped out of the labor force because they have become discouraged about their job prospects. During hard times, this statistic is often watched alongside the unemployment rate. If the job situation gets exceptionally bleak, it is possible to see the unemployment rate remaining stable not because people are finding jobs, but because they have given up looking and dropped out of the labor force.
Part-Time Workers
The issue of part time employment has arisen in recent years as many analysts have argued that strong payroll growth reflected the increase in the number of workers holding multiple part-time jobs. Since the payroll data do not differentiate between full and part-time workers, it is possible that a sudden surge in part-time employment which reflected poor full-time job prospects would actually boost payroll growth. In reality, it does not appear that this has happened, as part-time employment has been relatively steady in recent years. This figure nevertheless receives attention from time to time.
The Big Picture
Given the wealth of data contained in the employment report, it is important to take all of these indicators into account when passing judgment on the report. Looking at payrolls along is often misleading, as the workweek, earnings, and household employment measures may be telling a different story. Taken together, however, and taken with the caveats concerning monthly volatility and revisions, the employment report offers the best monthly glimpse of the economy.
Source: Bureau of Labor Statistics, U.S. Department of Labor.
Release Time: First Friday of the month at 8:30 ET for the prior month
Raw Data Available At: www.bls.gov
In Brief
The employment report is actually two separate reports which are the results of two separate surveys. The household survey is a survey of roughly 60,000 households. This survey produces the unemployment rate. The establishment survey is a survey of 375,000 businesses. This survey produces the nonfarm payrolls, average workweek, and average hourly earnings figures, to name a few. Both surveys cover the payroll period which includes the 12th of each month.
The reports both measure employment levels, just from different angles. Due to the vastly different size of the survey samples (the establishment survey not only surveys more businesses, but each business employs many individuals), the measures of employment may differ markedly from month to month. The household survey is used only for the unemployment measure - the market focusses primarily on the more comprehensive establishment survey. Together, these two surveys make up the employment report, the most timely and broad indicator of economic activity released each month.
Total payrolls are broken down into sectors such as manufacturing, mining, construction, services, and government. The markets follows these components closely as indicators of the trends in sectors of the economy; the manufacturing sector is watched the most closely as it often leads the business cycle. The data also include breakdowns of hours worked, overtime, and average hourly earnings.
The average workweek (also known as hours worked) is important for two reasons. First, it is a critical determinant of such monthly indicators as industrial production and personal income. Second, it is considered a useful indicator of labor market conditions: a rising workweek early in the business cycle may be the first indication that employers are preparing to boost their payrolls, while late in the cycle a rising workweek may indicate that employers are having difficulty finding qualified applicants for open positions. Average earnings are closely followed as an indicator of potential inflation. Like the price of any good or service, the price of labor reacts to an overly accommodative monetary policy. If the price of labor is rising sharply, it may be an indication that too much money is chasing too few goods, or in this case employees.
In Depth
The employment report is really two reports - the household survey and the establishment survey. These two surveys contain a wealth of timely information which justify this report's status as the most important economic release of the month. This same wealth of information can nevertheless turn into a dearth of knowledge if it is not placed in the proper context.
Household and Establishment Surveys
The household and establishment surveys differ due to the source of the data, as the names suggest. The household survey is a survey of households and the establishment survey is a surveys of businesses. The establishment survey, which is sometimes referred to as the payrolls survey, is favored by the market for a simple reason - it is far more comprehensive. Both surveys attempt to measure employment conditions at the roughly the same point in time - the household survey covers the calendar week which includes the 12th of the month while the establishment survey covers the pay period (be it a week, two weeks, or longer) which includes the 12th. But the establishment survey covers 390,000 businesses which employ 47 million people, while the household survey covers just 50,000 individuals. With a sample size which is 940 times larger than the household survey, it is hardly surprising that the market is more interested in the establishment survey.
Aside from the sample size, the surveys differ in other significant ways. The household survey counts farm workers, the self-employed, unpaid family workers, and private household workers as employed; the establishment survey does not. The household survey can only count one individual as employed once, even if that person holds two jobs. The establishment survey will double count an individual who appears on the payrolls of two companies. There are other, less significant differences, but let's turn now to the statistics produced by the two surveys.
The Establishment Survey
Nonfarm Payrolls
Without question, the single most important piece of data contained in the employment report generally and the establishment survey specifically is nonfarm payrolls. As the name implies, nonfarm payrolls measure the number of people on the payrolls of all non-agricultural businesses. The monthly changes in payrolls can be quite volatile, occasionally varying by better than 200K from one month to the next. Even with this volatility and the possibility of large revisions to past data, the payrolls figures offer the most timely and comprehensive snapshot of the economy.
Average Workweek
The workweek, also referred to as hours worked, is an often underrated indicator in the establishment survey. The average number of hours worked by employees on nonfarm payrolls is an important determinant of both industrial production and personal income in any given month. The workweek typically sees changes of a tenth or two each month, but can see much larger swings, such as the four tenth decline reported for October. To understand the importance of these changes in the workweek, note that a one tenth decline in the average workweek of 120 mln workers (roughly the current level of employment) results in 12 mln fewer hours worked. To create a similar decline in manhours through a change in employment, payrolls would have to fall 340K. For the purposes of production and income calculations, a one tenth of an hour change in the workweek is equivalent to a 340K change in employment. Needless to say, the workweek data are therefore critical in judging the overall strength or weakness of the employment report.
Aggregate Hours Worked
The aggregate hours worked index simply brings together the two series we just noted. By calculating an index which looks at both employment and the workweek, we get a complete picture of the total hours worked each month. This indicator is seen as a monthly proxy for GDP. By definition, the quarterly change in the amount of goods produced is equal to the change in manhours plus the change in productivity. As productivity is somewhat predictable from quarter to quarter, the aggregate hours worked index provides a helpful monthly read on the overall economy.
Average Hourly Earnings
The last indicator from the establishment survey which is worthy of close inspection is average hourly earnings, which is important for two reasons. Alongside total manhours, the average earnings figure gives us a good indication of personal income growth during the month. Second, the earnings figures are closely watched during periods of strong economic growth for evidence of increasing wage pressures. Such has certainly been the case over the past year, as the market's reaction to the employment data has often turned on the change in hourly earnings and its implications for the inflation outlook.
The Household Survey
The Unemployment Rate
As we noted earlier, the household survey is not nearly as reliable as the establishment survey due to the small size of the survey sample. This survey nevertheless receives attention, primarily because it is responsible for the one figure which is guaranteed to lead the nightly news - the unemployment rate. The unemployment rate demands little explanation, though it is worth noting that the rate can occasionally sees significant monthly changes which are due to flukes in the data. The rate is simply the result of dividing the number of people unemployed (labor force less employed) by the number of people in the labor force.
The problem is that the employment and labor force measures in the household survey are far more volatile than even nonfarm payrolls. The reason, of course, is the small survey sample size. It is therefore useful to look at the labor force and employment figures themselves to determine if changes in the unemployment rate are due to aberrant swings in one or both of these series.
Beyond the basics of tallying up the labor force and employment, the household survey breaks down these totals in every way imaginable - by gender, race, age, type of job, duration of unemployment, and on and on. These breakdowns seldom are of interest to the financial markets. Perhaps the only two exceptions are the discouraged worker and part-time worker measures.
Discouraged Workers
Discouraged workers are people who have dropped out of the labor force because they have become discouraged about their job prospects. During hard times, this statistic is often watched alongside the unemployment rate. If the job situation gets exceptionally bleak, it is possible to see the unemployment rate remaining stable not because people are finding jobs, but because they have given up looking and dropped out of the labor force.
Part-Time Workers
The issue of part time employment has arisen in recent years as many analysts have argued that strong payroll growth reflected the increase in the number of workers holding multiple part-time jobs. Since the payroll data do not differentiate between full and part-time workers, it is possible that a sudden surge in part-time employment which reflected poor full-time job prospects would actually boost payroll growth. In reality, it does not appear that this has happened, as part-time employment has been relatively steady in recent years. This figure nevertheless receives attention from time to time.
The Big Picture
Given the wealth of data contained in the employment report, it is important to take all of these indicators into account when passing judgment on the report. Looking at payrolls along is often misleading, as the workweek, earnings, and household employment measures may be telling a different story. Taken together, however, and taken with the caveats concerning monthly volatility and revisions, the employment report offers the best monthly glimpse of the economy.
Retail Sales report
Importance (A-F): This release merits an A-.
Source: The Census Bureau of the Department of Commerce.
Release Time: 8:30 ET around the 13th of the month (data for one month prior).
Raw Data Available At: www.census.gov
The retail sales report is a measure of the total receipts of retail stores. The changes in retail sales are widely followed as the most timely indicator of broad consumer spending patterns. Retail sales are often viewed ex-autos, as auto sales can move sharply from month-to-month. It is also important to keep an eye on the gas and food components, where changes in sales are often a result of price changes rather than shifting consumer demand.
Retail sales can be quite volatile and the advance reports are subject to rather large revisions. Retail sales do not include spending on services, which makes up over half of total consumption. Total personal consumption is not available until the personal income and consumption reports are released, typically two weeks after retail sales.
Source: The Census Bureau of the Department of Commerce.
Release Time: 8:30 ET around the 13th of the month (data for one month prior).
Raw Data Available At: www.census.gov
The retail sales report is a measure of the total receipts of retail stores. The changes in retail sales are widely followed as the most timely indicator of broad consumer spending patterns. Retail sales are often viewed ex-autos, as auto sales can move sharply from month-to-month. It is also important to keep an eye on the gas and food components, where changes in sales are often a result of price changes rather than shifting consumer demand.
Retail sales can be quite volatile and the advance reports are subject to rather large revisions. Retail sales do not include spending on services, which makes up over half of total consumption. Total personal consumption is not available until the personal income and consumption reports are released, typically two weeks after retail sales.
Regional Manufacturing Surveys
Importance (A-F): The Philadelphia Fed Index and Chicago PMI merit a B; the rest merit a D.
Source: Varies - Purchasing managers' organizations and Federal Reserve banks.
Release Time: Varies. Philadelphia Fed at 10 ET on the third Thursday of the month for the current month. Chicago PMI on the last business day of the month for the current month.
There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting. Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month. A few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM and are of little value. The purchasing managers' reports are measured like the national NAPM - 50% marks the breakeven line between an expanding and contracting manufacturing sector. For the Philadelphia and Atlanta Fed indices, 0 is the breakeven mark.
These surveys can be of some help in forecasting the national NAPM - particularly the Philadelphia and Chicago surveys which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.
Source: Varies - Purchasing managers' organizations and Federal Reserve banks.
Release Time: Varies. Philadelphia Fed at 10 ET on the third Thursday of the month for the current month. Chicago PMI on the last business day of the month for the current month.
There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting. Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month. A few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM and are of little value. The purchasing managers' reports are measured like the national NAPM - 50% marks the breakeven line between an expanding and contracting manufacturing sector. For the Philadelphia and Atlanta Fed indices, 0 is the breakeven mark.
These surveys can be of some help in forecasting the national NAPM - particularly the Philadelphia and Chicago surveys which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.
18 mar 2010
Productivity and Costs
Importance (A-F): This release merits a D+.
Source: The Bureau of Labor Statistics of the Department of Labor.
Release Time: 8:30 ET around the 7th of the second month of the quarter (data for quarter prior).
Raw Data Available At: www.bls.gov
Nonfarm productivity and costs provide measures of the productivity of workers and the costs associated with producing a unit of output. During times of inflationary concern, the unit labor cost index in this report can move the market. If productivity is falling, unit labor costs may be rising faster than hourly earnings and other labor cost measures. Because productivity can be quite volatile from one quarter to the next and because the previously released GDP report will give a good indication of productivity growth, this report seldom has a significant impact on the market.
In addition to the preliminary report, a revision to the productivity data is released in the third month of each quarter. As with the preliminary report, the GDP data released prior to the productivity data provide a clear indication of the direction of the productivity revision.
Source: The Bureau of Labor Statistics of the Department of Labor.
Release Time: 8:30 ET around the 7th of the second month of the quarter (data for quarter prior).
Raw Data Available At: www.bls.gov
Nonfarm productivity and costs provide measures of the productivity of workers and the costs associated with producing a unit of output. During times of inflationary concern, the unit labor cost index in this report can move the market. If productivity is falling, unit labor costs may be rising faster than hourly earnings and other labor cost measures. Because productivity can be quite volatile from one quarter to the next and because the previously released GDP report will give a good indication of productivity growth, this report seldom has a significant impact on the market.
In addition to the preliminary report, a revision to the productivity data is released in the third month of each quarter. As with the preliminary report, the GDP data released prior to the productivity data provide a clear indication of the direction of the productivity revision.
13 mar 2010
How to Trade Forex
Trading foreign exchange is exciting and potentially very profitable, but there are also significant risk factors. It is crucially important that you fully understand the implications of margin trading and the particular pitfalls and opportunities that foreign exchange trading offers. On these pages, we offer you a brief introduction to the Forex markets as well as their participants and some strategies that you can apply. However, if you are ever in doubt about any aspect of a trade, you can always discuss the matter in-depth with one of our dealers. They are available 24 hours a day on the Saxo Bank online trading system, SaxoTrader.The benchmark of its service is efficient execution, concise analysis and expertise – all achieved whilst maintaining an attractive and competitive cost structure. Today, Saxo Bank offers one of Europe's premier all-round services for trading in derivative products and foreign exchange. We count amongst our employees numerous dealers and analysts, each of whom has many years experience and a wide and varied knowledge of the markets – gained both in our home countries and in international financial centres. When trading foreign exchange, futures and other derivative products, we offer 24-hour service, extensive daily analysis, individual access to our Research & Analysis department for specific queries, and immediate execution of trades through our international network of banks and brokers. All at a price considerably lower than that which most companies and private investors normally have access to.
The combination of our strong emphasis on customer service, our strategy and trading recommendations, our strategic and individual hedging programmes, along with the availability to our clients of the latest news and information builds a strong case for trading an individual account through Saxo Bank.
Terms of trading are agreed individually depending on the volume of your transactions, but are generally much lower in cost when compared to banks and brokers. Your margin deposit can be cash or government securities, bank guarantees etc. Large corporate or institutional clients may be offered trading facilities on the strength of their balance sheet. The minimum deposit accepted for an individual trading account depends on the account type. Trade confirmations and real-time account overview are built into SaxoTrader, while further account information can be produced in accordance with your specific requirements.
Forex Trading Basics
The global foreign exchange market is the biggest market in the world. The 3.2 trillion USD daily turnover dwarfs the combined turnover of all the world's stock and bond markets.
There are many reasons for the popularity of foreign exchange trading, but among the most important are the leverage available, the high liquidity 24 hours a day and the very low dealing costs associated with trading.
Of course many commercial organisations participate purely due to the currency exposures created by their import and export activities, but the main part of the turnover is accounted for by financial institutions. Investing in foreign exchange remains predominantly the domain of the big professional players in the market - funds, banks and brokers. Nevertheless, any investor with the necessary knowledge of the market's functions can benefit from the advantages stated above.
In the following article, we would like to introduce you to some of the basic concepts of foreign exchange trading. If you would like any further information, we suggest that you sign up for a FREE Membership on this website, where you will be able to exchange views with other Forex traders and get answers to any questions you might have.
Margin Trading
Foreign exchange is normally traded on margin. A relatively small deposit can control much larger positions in the market. For trading the main currencies, Saxo Bank requires a 1% margin deposit. This means that in order to trade one million dollars, you need to place just USD 10,000 by way of security.
In other words, you will have obtained a gearing of up to 100 times. This means that a change of, say 2%, in the underlying value of your trade will result in a 200% profit or loss on your deposit. See below for specific examples. As you can see, this calls for a very disciplined approach to trading as both profit opportunities and potential risks are very large indeed. Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions.
Base Currency and Variable Currency
When you trade, you will always trade a combination of two currencies. For example, you will buy US dollars and sell euro. Or buy euro and sell Japanese yen, or any other combination of dozens of widely traded currencies. But there is always a long (bought) and a short (sold) side to a trade, which means that you are speculating on the prospect of one of the currencies strengthening in relation to the other.
The trade currency is normally, but not always, the currency with the highest value. When trading US dollars against Singapore dollars, the normal way to trade is buying or selling a fixed amount of US dollars, i.e. USD 1,000,000. When closing the position, the opposite trade is done, again USD 1,000,000. The profit or loss will be apparent in the change of the amount of SGD credited and debited for the two transactions. In other words, your profit or loss will be denominated in SGD, which is known as the price currency. As part of our service, Saxo Bank will automatically exchange your profits and losses into your base currency if you require this.
Dealing Spread, but No Commissions
When trading foreign exchange, you are quoted a dealing spread offering you a buying and a selling level for your trade. Once you accept the offered price and receive confirmation from our dealers, the trade is done. There is no need to call an exchange floor. There are no other time-consuming delays. This is possible due to live streaming prices, which are also a great advantage in times of fast-moving markets: You can see where the market is trading and you know whether your orders are filled or not.
The dealing spread is typically 3-5 points in normal market conditions. This means that you can sell US dollars against the euro at 1.7780 and buy at 1.7785. There are no further costs, commissions or exchange fees.
This ensures that you can get in and out of your trades at very low slippage and many traders are therefore active intra-day traders, given that a typical day in USDEUR presents price swings of 150-200 points.
Spot and forward trading
When you trade foreign exchange you are normally quoted a spot price. This means that if you take no further steps, your trade will be settled after two business days. This ensures that your trades are undertaken subject to supervision by regulatory authorities for your own protection and security. If you are a commercial customer, you may need to convert the currencies for international payments. If you are an investor, you will normally want to swap your trade forward to a later date. This can be undertaken on a daily basis or for a longer period at a time. Often investors will swap their trades forward anywhere from a week or two up to several months depending on the time frame of the investment.
Although a forward trade is for a future date, the position can be closed out at any time - the closing part of the position is then swapped forward to the same future value date.
Interest Rate Differentials
Different currencies pay different interest rates. This is one of the main driving forces behind foreign exchange trends. It is inherently attractive to be a buyer of a currency that pays a high interest rate while being short a currency that has a low interest rate.
Although such interest rate differentials may not appear very large, they are of great significance in a highly leveraged position. For example, the interest rate differential between the US dollar and the Japanese yen has been approximately 5% for several years. In a position that can be supported by a 5% margin deposit, this results in a 100% profit on capital per annum when you buy the US dollar. Of course, an even more important factor normally is the relative value of the currencies, which changed 15% from low to high during 2005 – disregarding the interest rate differential. From a pure interest rate differential viewpoint, you have an advantage of 100% per annum in your favour by being long US dollar and an initial disadvantage of the same size by being short.
Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions!
Such a situation clearly benefits the high interest rate currency and as result, the US dollar was in a strong bull market all through 2005. But it is by no means a certainty that the currency with the higher interest rate will be strongest. If the reason for the high interest rate is runaway inflation, this may undermine confidence in the currency even more than the benefits perceived from the high interest rate.
Stop-loss discipline
As you can see from the description above, there are significant opportunities and risks in foreign exchange markets. Aggressive traders might experience profit/loss swings of 20-30% daily. This calls for strict stop-loss policies in positions that are moving against you.
Fortunately, there are no daily limits on foreign exchange trading and no restrictions on trading hours other than the weekend. This means that there will nearly always be an opportunity to react to moves in the main currency markets and a low risk of getting caught without the opportunity of getting out. Of course, the market can move very fast and a stop-loss order is by no means a guarantee of getting out at the desired level.
But the main risk is really an event over the weekend, where all markets are closed. This happens from time to time as many important political events, such as G7 meetings, are normally scheduled for weekends.
For speculative trading, we always recommend the placement of protective stop-lossorders. With Saxo Bank Internet Trading you can easily place and change such orders while watching market development graphically on your computer screen.
There are many reasons for the popularity of foreign exchange trading, but among the most important are the leverage available, the high liquidity 24 hours a day and the very low dealing costs associated with trading.
Of course many commercial organisations participate purely due to the currency exposures created by their import and export activities, but the main part of the turnover is accounted for by financial institutions. Investing in foreign exchange remains predominantly the domain of the big professional players in the market - funds, banks and brokers. Nevertheless, any investor with the necessary knowledge of the market's functions can benefit from the advantages stated above.
In the following article, we would like to introduce you to some of the basic concepts of foreign exchange trading. If you would like any further information, we suggest that you sign up for a FREE Membership on this website, where you will be able to exchange views with other Forex traders and get answers to any questions you might have.
Margin Trading
Foreign exchange is normally traded on margin. A relatively small deposit can control much larger positions in the market. For trading the main currencies, Saxo Bank requires a 1% margin deposit. This means that in order to trade one million dollars, you need to place just USD 10,000 by way of security.
In other words, you will have obtained a gearing of up to 100 times. This means that a change of, say 2%, in the underlying value of your trade will result in a 200% profit or loss on your deposit. See below for specific examples. As you can see, this calls for a very disciplined approach to trading as both profit opportunities and potential risks are very large indeed. Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions.
Base Currency and Variable Currency
When you trade, you will always trade a combination of two currencies. For example, you will buy US dollars and sell euro. Or buy euro and sell Japanese yen, or any other combination of dozens of widely traded currencies. But there is always a long (bought) and a short (sold) side to a trade, which means that you are speculating on the prospect of one of the currencies strengthening in relation to the other.
The trade currency is normally, but not always, the currency with the highest value. When trading US dollars against Singapore dollars, the normal way to trade is buying or selling a fixed amount of US dollars, i.e. USD 1,000,000. When closing the position, the opposite trade is done, again USD 1,000,000. The profit or loss will be apparent in the change of the amount of SGD credited and debited for the two transactions. In other words, your profit or loss will be denominated in SGD, which is known as the price currency. As part of our service, Saxo Bank will automatically exchange your profits and losses into your base currency if you require this.
Dealing Spread, but No Commissions
When trading foreign exchange, you are quoted a dealing spread offering you a buying and a selling level for your trade. Once you accept the offered price and receive confirmation from our dealers, the trade is done. There is no need to call an exchange floor. There are no other time-consuming delays. This is possible due to live streaming prices, which are also a great advantage in times of fast-moving markets: You can see where the market is trading and you know whether your orders are filled or not.
The dealing spread is typically 3-5 points in normal market conditions. This means that you can sell US dollars against the euro at 1.7780 and buy at 1.7785. There are no further costs, commissions or exchange fees.
This ensures that you can get in and out of your trades at very low slippage and many traders are therefore active intra-day traders, given that a typical day in USDEUR presents price swings of 150-200 points.
Spot and forward trading
When you trade foreign exchange you are normally quoted a spot price. This means that if you take no further steps, your trade will be settled after two business days. This ensures that your trades are undertaken subject to supervision by regulatory authorities for your own protection and security. If you are a commercial customer, you may need to convert the currencies for international payments. If you are an investor, you will normally want to swap your trade forward to a later date. This can be undertaken on a daily basis or for a longer period at a time. Often investors will swap their trades forward anywhere from a week or two up to several months depending on the time frame of the investment.
Although a forward trade is for a future date, the position can be closed out at any time - the closing part of the position is then swapped forward to the same future value date.
Interest Rate Differentials
Different currencies pay different interest rates. This is one of the main driving forces behind foreign exchange trends. It is inherently attractive to be a buyer of a currency that pays a high interest rate while being short a currency that has a low interest rate.
Although such interest rate differentials may not appear very large, they are of great significance in a highly leveraged position. For example, the interest rate differential between the US dollar and the Japanese yen has been approximately 5% for several years. In a position that can be supported by a 5% margin deposit, this results in a 100% profit on capital per annum when you buy the US dollar. Of course, an even more important factor normally is the relative value of the currencies, which changed 15% from low to high during 2005 – disregarding the interest rate differential. From a pure interest rate differential viewpoint, you have an advantage of 100% per annum in your favour by being long US dollar and an initial disadvantage of the same size by being short.
Please refer to our page Forex Rates & Conditions for current Spreads, Margins and Conditions!
Such a situation clearly benefits the high interest rate currency and as result, the US dollar was in a strong bull market all through 2005. But it is by no means a certainty that the currency with the higher interest rate will be strongest. If the reason for the high interest rate is runaway inflation, this may undermine confidence in the currency even more than the benefits perceived from the high interest rate.
Stop-loss discipline
As you can see from the description above, there are significant opportunities and risks in foreign exchange markets. Aggressive traders might experience profit/loss swings of 20-30% daily. This calls for strict stop-loss policies in positions that are moving against you.
Fortunately, there are no daily limits on foreign exchange trading and no restrictions on trading hours other than the weekend. This means that there will nearly always be an opportunity to react to moves in the main currency markets and a low risk of getting caught without the opportunity of getting out. Of course, the market can move very fast and a stop-loss order is by no means a guarantee of getting out at the desired level.
But the main risk is really an event over the weekend, where all markets are closed. This happens from time to time as many important political events, such as G7 meetings, are normally scheduled for weekends.
For speculative trading, we always recommend the placement of protective stop-lossorders. With Saxo Bank Internet Trading you can easily place and change such orders while watching market development graphically on your computer screen.
12 mar 2010
PPI - Producer Price Index
Importance (A-F): This release merits a B-.
Source: Bureau of Labor statistics, U.S. Department of Labor.
Release Time: Around the 11th of each month at 8:30 ET for the prior month.
Raw Data Available At: www.bls.gov
The Producer Price Index measures prices of goods at the wholesale level. There are three broad subcategories within PPI: crude, intermediate, and finished. The market tracks the finished goods index most closely, as it represents prices for goods that are ready for sale to the end user. Goods prices at the crude and intermediate stages of production often provide an indication of coming (dis)inflationary pressures, but the closer you get to crude goods, the more that these prices track commodity prices which are already available in traded indices such as the CRB (Commodity Research Bureau).
At all stages of production, the market places more emphasis on the index excluding food and energy, referred to as the core rate. Food and energy prices tend to be quite volatile and obscure trends in the underlying inflation rate. Though the market reaction is determined by the month/month changes, year/year changes are also noted by analysts. The index is not revised on a monthly basis, but annual revisions to seasonal adjustment factors can produce small adjustments to past releases.
Source: Bureau of Labor statistics, U.S. Department of Labor.
Release Time: Around the 11th of each month at 8:30 ET for the prior month.
Raw Data Available At: www.bls.gov
The Producer Price Index measures prices of goods at the wholesale level. There are three broad subcategories within PPI: crude, intermediate, and finished. The market tracks the finished goods index most closely, as it represents prices for goods that are ready for sale to the end user. Goods prices at the crude and intermediate stages of production often provide an indication of coming (dis)inflationary pressures, but the closer you get to crude goods, the more that these prices track commodity prices which are already available in traded indices such as the CRB (Commodity Research Bureau).
At all stages of production, the market places more emphasis on the index excluding food and energy, referred to as the core rate. Food and energy prices tend to be quite volatile and obscure trends in the underlying inflation rate. Though the market reaction is determined by the month/month changes, year/year changes are also noted by analysts. The index is not revised on a monthly basis, but annual revisions to seasonal adjustment factors can produce small adjustments to past releases.
Philadelphia Fed Index
Importance (A-F): The Philadelphia Fed Index merits a B.
Source: The Philadelphia Federal Reserve bank.
Release Time: Third Thursday of the month at 10 ET for the current month.
In Brief
There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting. Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month. A few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM and are of little value. The purchasing managers' reports are measured like the national NAPM - 50% marks the breakeven line between an expanding and contracting manufacturing sector. For the Philadelphia and Atlanta Fed indices, 0 is the breakeven mark.
These surveys can be of some help in forecasting the national NAPM - particularly the Philadelphia and Chicago surveys which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.
In Depth
The market has been bombarded with a bevy of surveys purporting to measure manufacturing activity in every nook and cranny of the country. First it was Philadelphia, then Chicago, and Detroit, Milwaukee, New York, Cincinnati, Richmond, Atlanta, Boston, and there might as well have been a Nome survey. This hodge-podge of releases is begging for someone - namely us - to come along and cut this group down to a more manageable size, say....two. And the winners are...
Nuts and Bolts
Not so fast. We need a build-up before we cut to the proverbial chase. Let's start with the issue of what these manufacturing surveys are trying to measure and how they go about doing it. The leader of this pack of regional surveys is the NAPM - National Association of Purchasing Managers - index. It has been around since 1931 (1948 on an uninterrupted basis), it is national, and it is one of the most timely measures of manufacturing activity available. In other words, it sets the standards by which its progeny are measured.
The NAPM index is actually a composite of five sub-indices - new orders, production, supplier deliveries, inventories, and employment. In surveying over 300 companies each month, the NAPM asks for positive, negative, or unchanged readings on each of these indicators. The positive responses are added to one half of the unchanged responses to produce the diffusion index. For example, if 50% of respondents reported stronger orders, 40% reported weaker, and 10% unchanged, the diffusion index for orders would be 55%, the 50% positive plus half of the 10% unchanged. To calculate the total index, the NAPM uses weights for the five indicators, which are as follows: 30% new orders, 25% production, 20% employment, 15% supplier deliveries, and 10% inventories.
The Selection Criteria
Since this methodology has made the NAPM index one of the better leading indicators of economic activity over the years, we will measure the usefulness of the regional indices based on their ability to help in forecasting the national index. In our effort to arrive at the two most important regional index, these criteria make eliminating most of the candidates easy for one simple reason - they are released after the national index. While regional economic developments are of interest to those who live in the region, they are not particularly important to the Treasury market. If a region cannot help in forecasting national trends, then its data are not particularly useful. So say adios to Atlanta, Richmond, Kansas City, and who knows how many others which have cropped up in recent years.
And the Winners Are...
Let's focus on the regional surveys which precede the release of the national index on the first business day of each month (with data for the prior month). The contestants are Philadelphia, Chicago, Milwaukee, Detroit, New York, and the most recent addition to the bunch - the APICS survey. We looked at the correlation of all of these indices to the national NAPM and found substantial differences in their forecasting ability. The winners are...drum roll please...Chicago and Philadelphia, in that order.
The Chicago NAPM index, which is released on the last business day of the month (with data for the same month), has an impressive 91% correlation with the national NAPM. The Philadelphia Fed index, which is released on the third Thursday of the month (with data for the same month), was a distant second at 76%. Philly Fed's performance improved slightly to 78% when Briefing measured its results using the NAPM methodology. The Philly index as released is not a composite of its subindices, as the NAPM is. Instead, the Philly Fed survey asks many questions, but the total index is based on the general question "are business conditions better or worse than last month." It is often the case that a weighted measure of the individual questions on specifics such as new orders and production moves in a different direction than the index based on the general question.
The rest of the regional indices fared poorly, ranging from correlations as poor as 55% (APICS) to 73% (Milwaukee). Chicago was the clear winner, but the Philly Fed index definitely deserves recognition, particularly since it is released so much earlier than the rest. In the future, then, we would recommend setting aside most of the regional manufacturing surveys and focussing on just Philly and Chicago, which offer the best hope of predicting the national index. And when you look at the Philly index, improve your chances by looking at the Philly numbers calculated on an NAPM basis, which Briefing will be happy to provide.
Source: The Philadelphia Federal Reserve bank.
Release Time: Third Thursday of the month at 10 ET for the current month.
In Brief
There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting. Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month. A few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM and are of little value. The purchasing managers' reports are measured like the national NAPM - 50% marks the breakeven line between an expanding and contracting manufacturing sector. For the Philadelphia and Atlanta Fed indices, 0 is the breakeven mark.
These surveys can be of some help in forecasting the national NAPM - particularly the Philadelphia and Chicago surveys which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.
In Depth
The market has been bombarded with a bevy of surveys purporting to measure manufacturing activity in every nook and cranny of the country. First it was Philadelphia, then Chicago, and Detroit, Milwaukee, New York, Cincinnati, Richmond, Atlanta, Boston, and there might as well have been a Nome survey. This hodge-podge of releases is begging for someone - namely us - to come along and cut this group down to a more manageable size, say....two. And the winners are...
Nuts and Bolts
Not so fast. We need a build-up before we cut to the proverbial chase. Let's start with the issue of what these manufacturing surveys are trying to measure and how they go about doing it. The leader of this pack of regional surveys is the NAPM - National Association of Purchasing Managers - index. It has been around since 1931 (1948 on an uninterrupted basis), it is national, and it is one of the most timely measures of manufacturing activity available. In other words, it sets the standards by which its progeny are measured.
The NAPM index is actually a composite of five sub-indices - new orders, production, supplier deliveries, inventories, and employment. In surveying over 300 companies each month, the NAPM asks for positive, negative, or unchanged readings on each of these indicators. The positive responses are added to one half of the unchanged responses to produce the diffusion index. For example, if 50% of respondents reported stronger orders, 40% reported weaker, and 10% unchanged, the diffusion index for orders would be 55%, the 50% positive plus half of the 10% unchanged. To calculate the total index, the NAPM uses weights for the five indicators, which are as follows: 30% new orders, 25% production, 20% employment, 15% supplier deliveries, and 10% inventories.
The Selection Criteria
Since this methodology has made the NAPM index one of the better leading indicators of economic activity over the years, we will measure the usefulness of the regional indices based on their ability to help in forecasting the national index. In our effort to arrive at the two most important regional index, these criteria make eliminating most of the candidates easy for one simple reason - they are released after the national index. While regional economic developments are of interest to those who live in the region, they are not particularly important to the Treasury market. If a region cannot help in forecasting national trends, then its data are not particularly useful. So say adios to Atlanta, Richmond, Kansas City, and who knows how many others which have cropped up in recent years.
And the Winners Are...
Let's focus on the regional surveys which precede the release of the national index on the first business day of each month (with data for the prior month). The contestants are Philadelphia, Chicago, Milwaukee, Detroit, New York, and the most recent addition to the bunch - the APICS survey. We looked at the correlation of all of these indices to the national NAPM and found substantial differences in their forecasting ability. The winners are...drum roll please...Chicago and Philadelphia, in that order.
The Chicago NAPM index, which is released on the last business day of the month (with data for the same month), has an impressive 91% correlation with the national NAPM. The Philadelphia Fed index, which is released on the third Thursday of the month (with data for the same month), was a distant second at 76%. Philly Fed's performance improved slightly to 78% when Briefing measured its results using the NAPM methodology. The Philly index as released is not a composite of its subindices, as the NAPM is. Instead, the Philly Fed survey asks many questions, but the total index is based on the general question "are business conditions better or worse than last month." It is often the case that a weighted measure of the individual questions on specifics such as new orders and production moves in a different direction than the index based on the general question.
The rest of the regional indices fared poorly, ranging from correlations as poor as 55% (APICS) to 73% (Milwaukee). Chicago was the clear winner, but the Philly Fed index definitely deserves recognition, particularly since it is released so much earlier than the rest. In the future, then, we would recommend setting aside most of the regional manufacturing surveys and focussing on just Philly and Chicago, which offer the best hope of predicting the national index. And when you look at the Philly index, improve your chances by looking at the Philly numbers calculated on an NAPM basis, which Briefing will be happy to provide.
Personal Income & Consumption
Importance (A-F): This release merits a C+.
Source: The Bureau of Economic Analysis of the Department of Commerce.
Release Time: 8:30 ET around the first business day of the month (data for two months prior).
Raw Data Available At: www.bea.gov -- see personal income release.
Personal income measures income from all sources. The largest component of total income is wages and salaries, a figure which can be estimated using payrolls and earnings data from the employment report. Beyond that, there are many other categories of income, including rental income, government subsidy payments, interest income, and dividend income. Personal income is a decent indicator of future consumer demand, but it is not perfect. Recessions usually occur when consumers stop spending, which then drives down income growth. Looking solely at income growth, one may therefore miss the turning point when consumers stop spending.
The income report also includes a section covering personal consumption expenditures, also known as PCE. PCE is comprised of three categories: durables, nondurables, and services. The retail sales report will provide a good read on durable and nondurable consumption, while service purchases tend to grow at a fairly steady pace, making this a relatively predictable report, and ranking it well below retail sales in terms of market importance.
Source: The Bureau of Economic Analysis of the Department of Commerce.
Release Time: 8:30 ET around the first business day of the month (data for two months prior).
Raw Data Available At: www.bea.gov -- see personal income release.
Personal income measures income from all sources. The largest component of total income is wages and salaries, a figure which can be estimated using payrolls and earnings data from the employment report. Beyond that, there are many other categories of income, including rental income, government subsidy payments, interest income, and dividend income. Personal income is a decent indicator of future consumer demand, but it is not perfect. Recessions usually occur when consumers stop spending, which then drives down income growth. Looking solely at income growth, one may therefore miss the turning point when consumers stop spending.
The income report also includes a section covering personal consumption expenditures, also known as PCE. PCE is comprised of three categories: durables, nondurables, and services. The retail sales report will provide a good read on durable and nondurable consumption, while service purchases tend to grow at a fairly steady pace, making this a relatively predictable report, and ranking it well below retail sales in terms of market importance.
Non-Manufacturing NAPM
Importance (A-F): This release merits an D-.
Source: National Association of Purchasing Managers.
Release Time: 10:00 ET on the third business day of the month for the prior month.
Raw Data Available At: http://www.napm.org.
In Brief
The non-manufacturing NAPM report is a national survey of purchasing managers which covers new orders, employment, inventories, supplier delivery times, prices, backlog orders, export orders, and import orders. Diffusion indices are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.
The index should be far more indicative of the broader economy given its inclusion of service-producing as well as good-producing sectors outside of manufacturing. However, the short history of the index dates to only July 1997 and doesn't provide the insight of a longer period inclusive of varied economic climates. The seasonal adjustment of the index didn't begin until January 2001 with only 3 of the 9 components seasonally adjusted as of April 2001. The lack of historical data and lack of a tight correlation to the non-manufacturing economy leaves the relatively poor "D" rating compared to the "A-" rating of the well-respected manufacturing NAPM index.
In Depth
The Non-Manufacturing NAPM Report on Business is a newcomer not yet closely followed by the private sector.
Who and What It Surveys
The Non-Manufacturing NAPM index (sometimes refered to as the NAPM Service index) is the result of a monthly survey of over 370 companies. The survey queries respondents on a number of monthly indicators, including orders, employment, inventories, supplier delivery times, prices paid, order backlogs, export orders, and import orders. Respondents are asked to characterize each indicator as higher, lower, or unchanged for the month (or faster/slower in the case of delivery times). They are not asked for specific numbers - only a thumbs up or down.
Presenting the Numbers
Based on these responses, the NAPM calculates diffusion indices for each of the components. These diffusion indices are calculated by adding the half of the percentage of respondents answering "unchanged" to the full percentage answering "higher" (or "slower" for deliveries). These diffusion indices do not yield estimates of specific magnitudes of strength or weakness, but the more respondents who are indicating trends in the same direction - the better the chance that the magnitude of that move is larger.
A diffusion index of 50% is the theoretical breakeven mark - with readings above indicating strength and below indicating weakness. The total index is seasonally adjusted but only 3 of the 9 components are currently adjusted for seasonality.
The total index is the result of a separate question regarding general business conditions (unlike the Manufacturing NAPM which is calculated from some of the components). The business index is calculated using the same diffusion calculation used in the components then adjusted for seasonality.
Source: National Association of Purchasing Managers.
Release Time: 10:00 ET on the third business day of the month for the prior month.
Raw Data Available At: http://www.napm.org.
In Brief
The non-manufacturing NAPM report is a national survey of purchasing managers which covers new orders, employment, inventories, supplier delivery times, prices, backlog orders, export orders, and import orders. Diffusion indices are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.
The index should be far more indicative of the broader economy given its inclusion of service-producing as well as good-producing sectors outside of manufacturing. However, the short history of the index dates to only July 1997 and doesn't provide the insight of a longer period inclusive of varied economic climates. The seasonal adjustment of the index didn't begin until January 2001 with only 3 of the 9 components seasonally adjusted as of April 2001. The lack of historical data and lack of a tight correlation to the non-manufacturing economy leaves the relatively poor "D" rating compared to the "A-" rating of the well-respected manufacturing NAPM index.
In Depth
The Non-Manufacturing NAPM Report on Business is a newcomer not yet closely followed by the private sector.
Who and What It Surveys
The Non-Manufacturing NAPM index (sometimes refered to as the NAPM Service index) is the result of a monthly survey of over 370 companies. The survey queries respondents on a number of monthly indicators, including orders, employment, inventories, supplier delivery times, prices paid, order backlogs, export orders, and import orders. Respondents are asked to characterize each indicator as higher, lower, or unchanged for the month (or faster/slower in the case of delivery times). They are not asked for specific numbers - only a thumbs up or down.
Presenting the Numbers
Based on these responses, the NAPM calculates diffusion indices for each of the components. These diffusion indices are calculated by adding the half of the percentage of respondents answering "unchanged" to the full percentage answering "higher" (or "slower" for deliveries). These diffusion indices do not yield estimates of specific magnitudes of strength or weakness, but the more respondents who are indicating trends in the same direction - the better the chance that the magnitude of that move is larger.
A diffusion index of 50% is the theoretical breakeven mark - with readings above indicating strength and below indicating weakness. The total index is seasonally adjusted but only 3 of the 9 components are currently adjusted for seasonality.
The total index is the result of a separate question regarding general business conditions (unlike the Manufacturing NAPM which is calculated from some of the components). The business index is calculated using the same diffusion calculation used in the components then adjusted for seasonality.
11 mar 2010
New Home Sales
Importance (A-F): This release merits a C+.
Source: The Census Bureau of the Department of Commerce.
Release Time: 10:00 ET around the last business day of the month (data for month prior).
Raw Data Available At: http://www.census.gov/const/newressales.pdf
The report indicates the level of new privately owned one-family houses sold and for sale. New home sales usually have a lagged reaction to changing mortgage rates. They also tend to be stronger early in the business cycle when pent-up demand is strong, and they fade later in the cycle as the demand for housing is sated. In addition to home sales, the market monitors the number of homes for sale relative to the current sales pace. As this inventory measure falls (rises), housing starts tend to rise (fall). Finally, the median home price provides an indication of inflation in the housing sector, though only year/year changes provide any meaningful information.
The home sales report is quite volatile and subject to huge revisions, making any one month's reading very unreliable. The report rarely prompts a market reaction. The market prefers the existing home sales report, which has a sample data pool four times as large and is released earlier in the month.
Source: The Census Bureau of the Department of Commerce.
Release Time: 10:00 ET around the last business day of the month (data for month prior).
Raw Data Available At: http://www.census.gov/const/newressales.pdf
The report indicates the level of new privately owned one-family houses sold and for sale. New home sales usually have a lagged reaction to changing mortgage rates. They also tend to be stronger early in the business cycle when pent-up demand is strong, and they fade later in the cycle as the demand for housing is sated. In addition to home sales, the market monitors the number of homes for sale relative to the current sales pace. As this inventory measure falls (rises), housing starts tend to rise (fall). Finally, the median home price provides an indication of inflation in the housing sector, though only year/year changes provide any meaningful information.
The home sales report is quite volatile and subject to huge revisions, making any one month's reading very unreliable. The report rarely prompts a market reaction. The market prefers the existing home sales report, which has a sample data pool four times as large and is released earlier in the month.
NAPM: National Association of Purchasing Managers
Importance (A-F): This release merits an A-.
Source: National Association of Purchasing Managers.
Release Time: 10:00 ET on the first business day of the month for the prior month.
Raw Data Available At: http://www.napm.org.
In Brief
The NAPM report is a national survey of purchasing managers which covers such indicators as new orders, production, employment, inventories, delivery times, prices, export orders, and import orders. Diffusion indices are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.
The total index is calculated based on a weighted average of the following five sub-indices, with weights in parentheses: new orders (30%), production (25%), employment (20%), deliveries (15%), and inventories (10%).
The NAPM is one of the first comprehensive economic releases of the month, typically preceding the employment report. Though it covers only the manufacturing sector, it can often provide accurate hints regarding the tone of subsequent releases. During periods of inflation concerns, the prices paid and vendor deliveries indices often determine the bond market's reaction to the report.
In Depth
The National Association of Purchasing Managers monthly Report on Business is probably the most widely watched economic indicator produced by the private sector. There are two key reasons for the NAPM's prominence. First, its longevity - the report was first produced in 1931, and after a break during World War II, it has produced continuously since 1948. Second , its leading quality - the NAPM has been one of the better predictors of the business cycle over the years.
Who and What It Surveys
The NAPM index is the result of a monthly survey of over 300 companies in 20 industries throughout the 50 states. The survey queries respondents on a number of monthly indicators, including orders, production, employment, inventories, delivery times, prices paid, export orders, and import orders. Respondents are asked to characterize each indicator as higher, lower, or unchanged for the month (or faster/slower in the case of delivery times). They are not asked for specific numbers - only a thumbs up or down.
Presenting the Numbers
Based on these responses, the NAPM calculates diffusion indices for each of the components. These diffusion indices are calculated by adding the percentage of respondents answering "unchanged" to half of the percentage answering "higher" (or "slower" for deliveries). These diffusion indices do not yield estimates of specific magnitudes of strength or weakness, but the more respondents who are indicating trends in the same direction - the better the chance that the magnitude of that move is larger.
A diffusion index of 50% is the theoretical breakeven mark - with readings above indicating strength and below indicating weakness. The NAPM only provides the raw data - the Department of Commerce produces the seasonal factors which are used to provide more meaningful, seasonally adjusted indices.
The total index is not the result of a separate question regarding general business conditions (as is the case with the Philadelphia Fed index). Instead, the index is calculated using the weighted sum of five of the subindices. Orders account for 30% of the total; production - 25%; employment - 20%; deliveries - 15%; inventories - 10%. Prices, export orders, and import orders are not part of the total index.
Breakevens in Theory and Practice
Though 50% is the breakeven mark in theory, different readings have proved to be breakeven in practice. For new orders, 50.3% is the level consistent with breakeven readings in factory orders. For production, 49.4% has been the breakeven mark in theory and practice. For employment, 47.5% has been consistent with a steady level of manufacturing employment. For inventories, 41.3% has been consistent with steady business inventory readings. And finally, the 42.7% mark on the total index marks the point below which the overall economy is believed to be in recession. Between 42.7-50%, the manufacturing sector may be in decline, but the total economy is only seeing slower growth.
No Services
This observation highlights the important element which is missing from the NAPM index - the service sector. With the manufacturing sector making up an ever-shrinking percentage of the total economy - the NAPM might seem to be an indicator in decline. Not so, however - the manufacturing sector, while shrinking in relative terms, still tends to lead the total economy into and out of recessions. The NAPM therefore remains a closely watched indicator despite its manufacturing focus.
A Proven Performer
The NAPM's leading quality has been proven over time. Its bottom during a recession has preceded the turning point for the business cycle by an average of four months, and its worst performance in leading the turning point was on two occasions when the NAPM trough occurred in the same month as the business cycle trough. The NAPM index is released on the first business day of each at 10:00 ET, with data for the prior calendar month.
Source: National Association of Purchasing Managers.
Release Time: 10:00 ET on the first business day of the month for the prior month.
Raw Data Available At: http://www.napm.org.
In Brief
The NAPM report is a national survey of purchasing managers which covers such indicators as new orders, production, employment, inventories, delivery times, prices, export orders, and import orders. Diffusion indices are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.
The total index is calculated based on a weighted average of the following five sub-indices, with weights in parentheses: new orders (30%), production (25%), employment (20%), deliveries (15%), and inventories (10%).
The NAPM is one of the first comprehensive economic releases of the month, typically preceding the employment report. Though it covers only the manufacturing sector, it can often provide accurate hints regarding the tone of subsequent releases. During periods of inflation concerns, the prices paid and vendor deliveries indices often determine the bond market's reaction to the report.
In Depth
The National Association of Purchasing Managers monthly Report on Business is probably the most widely watched economic indicator produced by the private sector. There are two key reasons for the NAPM's prominence. First, its longevity - the report was first produced in 1931, and after a break during World War II, it has produced continuously since 1948. Second , its leading quality - the NAPM has been one of the better predictors of the business cycle over the years.
Who and What It Surveys
The NAPM index is the result of a monthly survey of over 300 companies in 20 industries throughout the 50 states. The survey queries respondents on a number of monthly indicators, including orders, production, employment, inventories, delivery times, prices paid, export orders, and import orders. Respondents are asked to characterize each indicator as higher, lower, or unchanged for the month (or faster/slower in the case of delivery times). They are not asked for specific numbers - only a thumbs up or down.
Presenting the Numbers
Based on these responses, the NAPM calculates diffusion indices for each of the components. These diffusion indices are calculated by adding the percentage of respondents answering "unchanged" to half of the percentage answering "higher" (or "slower" for deliveries). These diffusion indices do not yield estimates of specific magnitudes of strength or weakness, but the more respondents who are indicating trends in the same direction - the better the chance that the magnitude of that move is larger.
A diffusion index of 50% is the theoretical breakeven mark - with readings above indicating strength and below indicating weakness. The NAPM only provides the raw data - the Department of Commerce produces the seasonal factors which are used to provide more meaningful, seasonally adjusted indices.
The total index is not the result of a separate question regarding general business conditions (as is the case with the Philadelphia Fed index). Instead, the index is calculated using the weighted sum of five of the subindices. Orders account for 30% of the total; production - 25%; employment - 20%; deliveries - 15%; inventories - 10%. Prices, export orders, and import orders are not part of the total index.
Breakevens in Theory and Practice
Though 50% is the breakeven mark in theory, different readings have proved to be breakeven in practice. For new orders, 50.3% is the level consistent with breakeven readings in factory orders. For production, 49.4% has been the breakeven mark in theory and practice. For employment, 47.5% has been consistent with a steady level of manufacturing employment. For inventories, 41.3% has been consistent with steady business inventory readings. And finally, the 42.7% mark on the total index marks the point below which the overall economy is believed to be in recession. Between 42.7-50%, the manufacturing sector may be in decline, but the total economy is only seeing slower growth.
No Services
This observation highlights the important element which is missing from the NAPM index - the service sector. With the manufacturing sector making up an ever-shrinking percentage of the total economy - the NAPM might seem to be an indicator in decline. Not so, however - the manufacturing sector, while shrinking in relative terms, still tends to lead the total economy into and out of recessions. The NAPM therefore remains a closely watched indicator despite its manufacturing focus.
A Proven Performer
The NAPM's leading quality has been proven over time. Its bottom during a recession has preceded the turning point for the business cycle by an average of four months, and its worst performance in leading the turning point was on two occasions when the NAPM trough occurred in the same month as the business cycle trough. The NAPM index is released on the first business day of each at 10:00 ET, with data for the prior calendar month.
Money Supply
Importance (A-F): This release merits an F.
Source: Federal Reserve Board.
Release Time: Every Thursday at 16:30 ET, data for the week ended two Mondays prior.
Raw Data Available at: www.federalreserve.gov
In Brief
Money supply figures, and M1 specifically, once were the most important release to watch in the Treasury market, as the Fed directly targetted M1 growth in the early 1980s. The focus on money supply has long since been abandoned, however. To the extent that money supply is still monitored by the market, M2 is the favored monetary aggregate. The Fed still targets both M2 and M3 in a rhetorical sense, but these targets mean little when it comes to policy decisions. If the Fed misses its target, it is more likely to change the target than it is to change policy. In 2000, the Fed finally abandoned the targets altogether, thereby removing any remaining emphasis on this one-time star release.
In Depth
Though money supply measures were long ago relegated to the bottom of the Fed's list of policy tools, they are still useful in providing clues regarding the strength of the economy. This article offers a refresher on just what the monetary aggregates are - how they are constructed, why they matter, and how much the Fed cares about each. Let's start with the strict definitions.
M1, the narrowest of the monetary aggregates, contains the following:
Currency, except that held by the Fed, Treasury, or banks/thrifts
Travelers checks
Demand deposits (non-interest bearing checking accounts), except those due to banks, the government, or foreign institutions
Other checkable deposits - most notably NOW (negotiable order of withdrawal) accounts
M2, the aggregate which the Fed watches most closely, contains the following:
M1
Savings deposits (including money market deposit accounts- MMDAs)
Time deposits (known commonly as CDs or certificates of deposit) in denominations of less than $100,000
Balances in retail money market funds (retail funds have minimum initial investments of less than $50,000)
Finally, M3 - the broadest aggregate - contains:
M2
Time deposits in denominations of $100,000 or more
Balances in institutional money market funds (minimum investments of more than $50,000)
Overnight and term repurchase agreements
Overnight and term eurodollars held by U.S. residents
The Decline of M1
In the early 1980s, M1 was directly targetted by the Federal Reserve, and its weekly release was of critical importance to the financial markets. Today, M1 is barely noticed, and its stock continues to decline. The reason for M1's demise as a useful indicator is financial deregulation, which enabled individuals to hold transaction balances in accounts such as MMDAs which were not included in M1. More recently, M1 has lost what little usefulness it had left as sweep accounts have undermined the narrow aggregate.
Sweeps-stakes
Sweep accounts are a hybrid checking account/savings account. In a typical sweep account, banks will sweep part of a NOW account's balance into an MMDA. As funds are needed to cover checks written against the NOW account, the bank will periodically shift funds from the MMDA back into the NOW account. Since the legal maximum number of withdrawals from an MMDA is six per month, all funds will be shifted back to the NOW account on the sixth transaction of the month.
Sweep accounts benefit both banks and depositors. Banks benefit because MMDAs do not require any reserves to be held with the Fed, while NOW accounts are reservable. As these required reserves are non-interest bearing, banks benefit by reducing their level of required reserves. Depositors benefit because MMDAs carry higher interest rates, and thus earnings on checking balances are increased.
As NOW accounts are in M1 and MMDAs are in M2, M1 has been dramatically weakened by sweeps, while M2 has not been affected (since M2 already includes M1, a shift from a NOW account to an MMDA has no impact on M2).
The Rise and Fall and Rise of M2
M2 is the most closely watched monetary aggregate - both by economists and the Federal Reserve. The 1978 Humphrey-Hawkins Act mandated that the Fed set annual targets for money supply and that the Fed Chairman report to Congress twice each year regarding these targets. The Fed used to take that responsibility quite seriously - setting point targets for M1 growth, and later setting target ranges for M2 and M3. Finally, in 2000, the Fed abandoned these money targetting altogether.
The reduced emphasis on M2 first became evident in the late 1980s but was sealed in the early 1990s. M2 is a useful indicator only so long as its velocity (the rate of turnover of a dollar of M2, or mathematically, nominal GDP divided by M2) is stable over the long term. Unfortunately, the long term stability of M2 velocity, which was at the core of monetarism, disappeared beginning in the late 1980s. Banks and thrifts, devastated by nonperforming assets, pulled back from their traditional lending business, with market financing sources picking up the slack. The result was a break from the long term trend in M2 velocity. Suddenly, one dollar of M2 could fund far more nominal GDP growth, as market financing increased the efficiency of the financial system.
Regardless of the hows and whys - which are still debated by economists - the bottom line was that M2 was no longer a reliable indicator.
It will take many years of predictable velocity before the Fed once again places much emphasis on M2 in its policy deliberations. And it is safe to say that neither M2 nor any other monetary aggregate will occupy the top spot in policy making as M1 did in the early 1980s. The record of interest rate targetting has simply been much better than that of money targetting.
M3: Still Bringing Up the Rear
M3 attracts more attention than it did previously, due largely to the demise of M1, but its inclusion of institutional accounts makes it less attractive than M2, which focusses on individual deposit accounts. The bottom line in determining which aggregate receives the most attention is the relative stability of its velocity. Even though M2 velocity went off course in the early 1990s, it has still been the most predictable of the three during the postwar period.
Source: Federal Reserve Board.
Release Time: Every Thursday at 16:30 ET, data for the week ended two Mondays prior.
Raw Data Available at: www.federalreserve.gov
In Brief
Money supply figures, and M1 specifically, once were the most important release to watch in the Treasury market, as the Fed directly targetted M1 growth in the early 1980s. The focus on money supply has long since been abandoned, however. To the extent that money supply is still monitored by the market, M2 is the favored monetary aggregate. The Fed still targets both M2 and M3 in a rhetorical sense, but these targets mean little when it comes to policy decisions. If the Fed misses its target, it is more likely to change the target than it is to change policy. In 2000, the Fed finally abandoned the targets altogether, thereby removing any remaining emphasis on this one-time star release.
In Depth
Though money supply measures were long ago relegated to the bottom of the Fed's list of policy tools, they are still useful in providing clues regarding the strength of the economy. This article offers a refresher on just what the monetary aggregates are - how they are constructed, why they matter, and how much the Fed cares about each. Let's start with the strict definitions.
M1, the narrowest of the monetary aggregates, contains the following:
Currency, except that held by the Fed, Treasury, or banks/thrifts
Travelers checks
Demand deposits (non-interest bearing checking accounts), except those due to banks, the government, or foreign institutions
Other checkable deposits - most notably NOW (negotiable order of withdrawal) accounts
M2, the aggregate which the Fed watches most closely, contains the following:
M1
Savings deposits (including money market deposit accounts- MMDAs)
Time deposits (known commonly as CDs or certificates of deposit) in denominations of less than $100,000
Balances in retail money market funds (retail funds have minimum initial investments of less than $50,000)
Finally, M3 - the broadest aggregate - contains:
M2
Time deposits in denominations of $100,000 or more
Balances in institutional money market funds (minimum investments of more than $50,000)
Overnight and term repurchase agreements
Overnight and term eurodollars held by U.S. residents
The Decline of M1
In the early 1980s, M1 was directly targetted by the Federal Reserve, and its weekly release was of critical importance to the financial markets. Today, M1 is barely noticed, and its stock continues to decline. The reason for M1's demise as a useful indicator is financial deregulation, which enabled individuals to hold transaction balances in accounts such as MMDAs which were not included in M1. More recently, M1 has lost what little usefulness it had left as sweep accounts have undermined the narrow aggregate.
Sweeps-stakes
Sweep accounts are a hybrid checking account/savings account. In a typical sweep account, banks will sweep part of a NOW account's balance into an MMDA. As funds are needed to cover checks written against the NOW account, the bank will periodically shift funds from the MMDA back into the NOW account. Since the legal maximum number of withdrawals from an MMDA is six per month, all funds will be shifted back to the NOW account on the sixth transaction of the month.
Sweep accounts benefit both banks and depositors. Banks benefit because MMDAs do not require any reserves to be held with the Fed, while NOW accounts are reservable. As these required reserves are non-interest bearing, banks benefit by reducing their level of required reserves. Depositors benefit because MMDAs carry higher interest rates, and thus earnings on checking balances are increased.
As NOW accounts are in M1 and MMDAs are in M2, M1 has been dramatically weakened by sweeps, while M2 has not been affected (since M2 already includes M1, a shift from a NOW account to an MMDA has no impact on M2).
The Rise and Fall and Rise of M2
M2 is the most closely watched monetary aggregate - both by economists and the Federal Reserve. The 1978 Humphrey-Hawkins Act mandated that the Fed set annual targets for money supply and that the Fed Chairman report to Congress twice each year regarding these targets. The Fed used to take that responsibility quite seriously - setting point targets for M1 growth, and later setting target ranges for M2 and M3. Finally, in 2000, the Fed abandoned these money targetting altogether.
The reduced emphasis on M2 first became evident in the late 1980s but was sealed in the early 1990s. M2 is a useful indicator only so long as its velocity (the rate of turnover of a dollar of M2, or mathematically, nominal GDP divided by M2) is stable over the long term. Unfortunately, the long term stability of M2 velocity, which was at the core of monetarism, disappeared beginning in the late 1980s. Banks and thrifts, devastated by nonperforming assets, pulled back from their traditional lending business, with market financing sources picking up the slack. The result was a break from the long term trend in M2 velocity. Suddenly, one dollar of M2 could fund far more nominal GDP growth, as market financing increased the efficiency of the financial system.
Regardless of the hows and whys - which are still debated by economists - the bottom line was that M2 was no longer a reliable indicator.
It will take many years of predictable velocity before the Fed once again places much emphasis on M2 in its policy deliberations. And it is safe to say that neither M2 nor any other monetary aggregate will occupy the top spot in policy making as M1 did in the early 1980s. The record of interest rate targetting has simply been much better than that of money targetting.
M3: Still Bringing Up the Rear
M3 attracts more attention than it did previously, due largely to the demise of M1, but its inclusion of institutional accounts makes it less attractive than M2, which focusses on individual deposit accounts. The bottom line in determining which aggregate receives the most attention is the relative stability of its velocity. Even though M2 velocity went off course in the early 1990s, it has still been the most predictable of the three during the postwar period.
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