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.

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.

Forex Books (Amazon.com)

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.

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.

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.

Leading Indicators Report

Importance (A-F): This release merits a C-.
Source: The Conference Board.
Release Time: 8:30 ET around the third week of the month for the month prior.
Raw Data Available at: www.tcb-indicators.org

In Brief
The Leading Indicators report is, for the most part, a compendium of previously announced economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices. Therefore, the report is extremely predictable and of very little interest to the market. Though this series does have some predictive qualities, it is a common criticism that it has predicted "nine of the last six" recessions.

The Commerce Department previously published the leading indicators series. The collection and publishing of these data is now done by the non-profit Conference Board, which also produces the Consumer Confidence index.

In Depth

Purpose
The purpose of the leading index is straightforward: It is designed to signal turning points in the business cycle.

Composition
The index of leading indicators includes the ten economic statistics listed below.

The interest rate spread between 10-year Treasury notes and the federal funds rate.
The inflation-adjusted, M2 measure of the money supply.
The average manufacturing workweek.
Manufacturers' new orders for consumer goods and materials.
The S&P 500 measure of stock prices.
The vendor performance component of the NAPM index.
The average level of weekly initial claims for unemployment insurance.
Building permits.
The University of Michigan index of consumer expectations.
Manufacturers' new orders for nondefense capital goods.
The Conference Board, the organization that produces the leading index, standardizes these variables according to their individual weights in order to construct a composite leading index. Note that we have listed the components in order of importance. The difference between 10-year Treasuries and the fed funds rate carries the most weight; historically, this approximation of the slope of the yield curve has proven relatively more successful than other components at predicting future economic activity. Along those same lines, orders for nondefense capital goods carry the smallest weight because they have typically proven relatively poorer at pointing to changes in the direction of economic growth at large.

Performance
The leading index receives plenty of criticism. Indeed, skeptics often joke that it has correctly signalled nine of the last six recessions. Meanwhile, in its literature, The Conference Board cites the lead times with which the leading index has correctly predicted economic downturns. It is thus fair to ask whether the leading index is useless or priceless.

The answer lies somewhere in between. The charge that the index predicts recessions that do not come to fruition--and fails to warn of those that do--is hardly a fair criticism. No forecaster, even armed with an arsenal of economic statistics, has a perfect track record when it comes to predicting recessions. It is therefore unreasonable to assume that a ten-component index can do any better. That said, the index does have some reliability problems. For example, it failed to turn down prior to the 1990-91 recession, and in 1995 it signalled a downturn that never came to pass.

Usefulness
The leading index is more useful now that The Conference Board has taken control of it (the Department of Commerce stopped producing it at the end of 1996). Conference Board researchers quickly scrapped two of the old components--the change in sensitive materials prices and unfilled orders for durable goods--and added the interest-rate spread that appears in our list above. The index now lacks a wholesale price term, which some see as critical to determining future demand and inflation trends, but on net the new index emits less pronounced false signals and does a better job than it used to.

Briefing finds the leading index most helpful when we can make a statement like this: The leading index has decreased only once during the past year. Of course, even a strong trend like that does not guarantee that a recession will not form over the coming six to nine months. But we can get additional help from looking at the leading index with the coincident index, which is also published by The Conference Board, and alongside a couple of other leading indices published by Columbia University. Indeed, there exists much research that deals with the criteria for determining recession warnings (i.e., the leading index must fall during four of seven months and the coincident index must fall for three straight months).