The Economic Indicators (and Non-Indicators) Dealers Should Be Watching
We start out this year on challenging economic footing and, if you’re anything like me, you’re probably about sick of hearing about it. But just when I reach for the mouse or the remote to avoid yet another report on the state of our economy, I take pause to remind myself that pilots check a lot of gauges before they decide to land a plane. Making business decisions without reliable information can be the equivalent of flying blind.
Now you can watch national news reports for general macroeconomic analysis and cruise through this issue’s annual forecast article to see what others in our industry are expecting for the next 12 months or so, but your business is unique—you sell to a certain market segment in a certain geographic region with a certain window and door product mix. So how can you come up with your business’s forecast for the year? Which economic indicators will you use to make business decisions? Maybe instead of relying on the media to tell you it’s safe to land your plane, you should check the gauges yourself and make an interpretation based on the raw data in front of you.
I wouldn’t go so far as to say that reading economic indicators is as tricky as landing a plane, but I sure felt that way before I completed a Master’s of Business Administration. This credential in no way makes me a financial expert, but it does put me in a great social network of educated folks who will take a phone call from a representative of the residential fenestration industry. So between my MBA and some of my financial-whiz friends, I’m hoping to give you a run-down on some of the economic indicators and non-economic-indicators I think will provide window and door dealers with a business-planning roadmap for this year.
DID YOU NOTICE THE HALF-WAY POINT?
Usually the cyclical patterns of recessions offer some target—even if it’s broad—at which investors and market watchers can aim their darts. My MBA teammate, Gregory Van Laeken, is a business analyst and risk management guru for Rochester Institute of Technology and spent a good chunk of his life as a currency trader in New York City and Switzerland. I called him toward the end of last year to get his opinion on what indices window and door dealers should be watching in this crazy market. He reminded me that the stock market can often sound some alarms when we’ve hit the half-way point of a recession. If the November 20th S&P 500 low “holds” until the time of this publication, it could indicate that we ended 2008 having just passed the half-way point. That would mean we won’t emerge from the doldrums until around October this year.
Still, this is a wacky recession that is stumping even the brightest of economists, so who’s to say that the normal cyclical patterns will hold? “Typically recessions last about 15 months, but we’ve already been in this recession for a year and it doesn’t really feel like we’re on the way out yet,” Van Laeken says. “This is such a unique time. The [National Bureau of Economic Research] has announced that we’ve been in a recession since December ’07. Typically that would be good news because it means we’ve been in a recession for a year and now we’d be on the way back out. But it doesn’t feel that way this time.”
Perhaps instead of relying on the typical 15-month time frame, the stock market “are we there yet?” indicator will hold up in this elongated cycle. If late November was our milestone for the stock market low, we can take a guess at how much longer we’ll have to hold our breath until we see some positive growth in the economy.
THE PLOY IN UNEMPLOYMENT
Unemployment figures (stats.bls.gov/news.release/empsit.toc.htm) are a lagging indicator because companies often struggle with slumping profitability for a while before they turn to downsizing as a last resort. The numbers we see released today are a reflection of challenging economic conditions for the months leading up to the layoff. Unemployment figures do have a silver lining for companies because scaling down the workforce often puts them in a position to start making money again. The problem for our industry, of course, is that we rely on people having jobs to be able to pay for housing and home improvement projects.
More scary for window and door dealers than the people who have actually lost their jobs are the multiples of people who see reports on unemployment and start worrying that they will lose their jobs too. This is where Mr. Van Laeken and I spent some considerable time conversing about the power of market psychology. Example #1: The Federal Government’s involvement in Fannie Mae and Freddie Mac means consumers should be able to obtain lower mortgage rates, which should, in turn, spur new and existing home purchases. The problem, however, is that people are gun shy with all the layoffs making headlines. “If they’re afraid of losing their jobs, they’re way less likely to make a big commitment,” Van Laeken says.
Here’s example #2 of why unemployment figures rain on our parade: The psychological aspect of unemployment rates affect even healthy companies. Executives working for strong and growing companies may hold off on hiring additional workers until their outlook on the economy is bullish. “That’s why these things get so bad,” Van Laeken points out. “The perception affects the reality in both directions. That’s how we end up in a death spiral.”
Keeping a close eye on the movement of unemployment figures will give you a good idea of what’s coming down the pike in terms of consumer confidence… or perhaps we should say…
The Consumer Confidence Survey (www.conference-board.org/economics/ConsumerConfidence.cfm) is just that—a survey. The Conference Board by TNS, a research company, contacts 5,000 households per month to gauge consumers’ current and short-term outlook on the economy. It’s not based on actual facts and figures floating around the economy like number of sales of a widget or the number of bodies without full-time jobs, but rather a sampling of consumers’ perceptions of how things are going in the marketplace. As with any survey, there is some room for error—as well as that negativity-feeding-negativity death spiral we discussed already—but the results of this survey are likely heavily dependent on real indicators like unemployment.
The “gray” area of consumer confidence and market psychology can cause a businessperson an ulcer for its irrationality, but it might also be the ticket to survival if he or she can develop a gut feel for how consumers, en masse, will behave. Van Laeken told me that, as a currency trader, he observed that what set good traders apart from average traders was their ability to “feel” the market. Some of his colleagues ignored economic indicators entirely and made buy-sell decisions solely on the price action happening in front of them.
As this crazy market continues to wrestle its way toward equilibrium, watch the movement of the Consumer Confidence Index. At the end of 2008, the index reached an all-time low in October and improved only moderately in November. The baseline for the index is a score of 100 (pegged to the year 1985) and we ended 2008 hovering down around 50 or below. Not great. Still, watch the index’s movement as we make our way through this year. You’re likely to see some positive strides in consumer confidence before you see upticks in home purchases or retail sales. People have to feel good before they go spend money. So if you see them starting to feel good, based on this survey, it might be time to start pushing your marketing message.
OTHER INDICATORS TO WATCH
- The NAPM (National Association of Purchasing Managers) report is a national survey of purchasing managers which covers indicators such as new orders, production, employment, inventories, delivery times, prices, export orders, and import orders (www.napm.org). First produced in 1931 (and continually since then with only a brief break during World War II), the NAPM index is the result of a monthly survey of more than 300 companies in 20 industries throughout the 50 states. Forex-Brokerage-Firms.com calls this indicator a “proven performer,” noting that “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 retail sales report (www.census.gov/marts/www/marts.html), while it doesn’t include spending on services, can give a good picture of consumer demand with its report on the total receipts of retail stores. According to Forex-Brokerage-Firms.com, “the changes in retail sales are widely followed as the most timely indicator of broad consumer spending patterns.” You’ll have to ignore the auto component, as well as the food and gas sales (which are often affected by price more than big changes in consumer demand). And don’t forget that service, which accounts for about half of our total consumption, is not reflected in these numbers. Still, with its quick turn-around time, the retail sales report lets you keep your finger on the pulse of consumer spending.
- Another leading indicator of manufacturing activity is the durable goods orders release (www.census.gov/ftp/pub/indicator/www/m3/index.htm). This report measures the dollar volume of orders, shipments, and unfilled orders of durable goods (defined as goods whose intended lifespan is three years or more). A word of caution here about this particular report: Often the market moves on the durable goods orders report despite the fact that it is often susceptible to sizeable revisions. To make it work for your business, you need to break down the nature of the orders. The total number is often skewed by big spikes in aircraft and defense orders, Forex-Brokerage-Firms.com points out. Instead, check out the nondefense capital goods segment. According to the report card, “these goods mirror the GDP category producers' durable equipment (PDE)—the largest component of business investment. Shipments of nondefense capital goods are a good proxy for PDE in the current quarter, while nondefense capital goods orders provide an indication of PDE growth in the quarters ahead.”
One parting thought as I leave you with this economic lesson. It’s not really an indicator, so we’ll call it a “non-indicator” of where our economy stands. I’d like to point out—hopefully as a reminder to you—that the Census Bureau and Department of Housing and Urban Development told us a few years ago that nearly 40 percent of all residential properties in the United States are owned outright. This means that a significant percentage of our population has access to credit. Van Laeken’s comment on this group of people: “Banks would trip over each other to lend money to those non-mortgaged homeowners.”
Let’s hope so. It’s a start.
I wish you and your business the best of luck in 2009. I look forward to writing this column in January of next year in the context of a much rosier economic picture. In the meantime, if there are any business-related topics you’d like to see me explore, please send me an email to share your thoughts.