Rough waters on Wall St., smooth sailing on Main St.

September 12, 2007

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You don"t need me to tell you that the Wall Street roller coaster is moving a little too quickly and unpredictably lately. Any investor paying even the slightest amount of attention is feeling something between growing wariness and outright alarm. After breaking 14,000 in July, the Dow Jones Industrial Average went south of 13,000 in August before it stabilized. Or maybe it hasn"t stabilized. Who knows what tomorrow will bring?

Maybe a better question is, Can we expect the economy to head south too? The answer is, Not necessarily. The connection between the stock market and the economy is weak, at best. The DJIA was around 11,000 in July 2006 and broke 14,000 a year later, which amounted to nearly 30 percent growth in 12 months. In the same timeframe, the U.S. economy grew from $13.155 trillion to $13.775 trillion, an increase of less than 5 percent. It seems safe to say that the economy runs on business fundamentals and the market runs on emotion, and the two aren"t closely connected.
Consumer confidence is another indicator that veers all over the place. As tallied and reported by The Conference Board, consumer confidence reached a six-year high of 112.6 in July. It fell to 105.0 in August. Did economic activity drop off rapidly in a mere 30 days? Not likely. More likely, this rapid drop was influenced by a handful of bad headlinesstock market woes, rising gas prices, and this sort of thing.

The manufacturing industry's old standby, the PMI was 52.9 percent in August. That's not too hot, for two reasons. First, compared to the July reading, it is a decline of 0.9 percent. Second, taken on its own, it's not very high. Fifty percent is the breakpointa reading greater than 50 means that manufacturing is expanding; a reading less than 50 means that manufacturing is contracting.

Digging deeper reveals that the New Orders Index, which is a predictor of future activity, was 57.5 percent in July. Data from the U.S. Census Bureau"s Manufacturing and Construction Division backs this up. Its Aug. 31 press release states that new orders for manufactured goods increased 3.7 percent to $436.7 billion.

Want one more piece of good news? Many economists follow commodity prices. High or rising commodity prices indicate strong demand for raw materials, which is a general indicator of economic health. The Commodity Research Bureau (CRB) tracks dozens of commodities, and it"s a simple thing to go to www.crbtrader.com/crbindex and click on Monthly Charts and Data.

Some economists go further and look at initial claims for unemployment insurance. This information is goldit is reported frequently (weekly) and not subject to revision upon revision as are many other economic reports.

If you think that economists don't have a sense of humor, hang on to your hat. Some nutty economist came up with the great idea of creating a ratio by dividing the raw materials spot price index by the number of unemployment claims. This created a supersensitive index that provides a good look at current and future economic conditions.

You don"t have to track down the data and build your own table. I saved you the trouble. The Commodities-to-Claims Index hit peaks in the neighborhood of 0.8 to 1.0 throughout the 1970s, 1980s, and 1990s. Today it exceeds 1.6.

Sounds like good news to me.


FMA Communications Inc.

Eric Lundin

Editor
FMA Communications Inc.
833 Featherstone Road
Rockford, IL 61107
Phone: 815-227-8262
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