Since European nations and the US began locking down their national economies in order to contain the spread of COVID-19 in March, financial commentators we follow have fixated on economic data that measure the impact. Most of the numbers were huge, including enormous dips and historically large rebounds. Many analysts warn Q2 gross domestic product (GDP, a government-produced measure of economic output) could be dramatically bad, before leaping in Q3, tied to broader economic reopenings. As such huge numbers and extreme swings can be daunting, we thought investors would benefit from a primer on what various economic data measure and what the numbers mean.
The main monthly indicators in most countries are retail sales and industrial production. The former measures how much people spend in shops and online. Some countries include restaurants, whilst others omit food services. Some report the quantity of goods sold in order to control for inflation and discounting; others feature the value of goods sold. Some report both. In many countries, private-sector outlets offer slightly timelier, if narrower, measures of sales. In the UK, for example, the British Retailer Consortium surveys a smaller sample of businesses than the Office for National Statistics, releasing the data about a week earlier than the government’s official tally. Barclaycard has its own tally, which approximates retail sales based on bank card transactions. Other outlets measure retail footfall—the number of customers shopping. Industrial production generally reports the quantity of goods produced by heavy industry. This includes manufacturing output as well as utilities and mining. Many countries, like Germany, also release factory orders, which many commentators consider a leading indicator of factory output. Generally speaking, today’s orders are tomorrow’s production.
The other main popular monthly report amongst industry and news commentators we follow is the purchasing managers’ index (PMI). This is a survey that aims to measure how many businesses are experiencing increased activity. Readings over 50 mean over half of businesses are expanding, which the survey providers (most notably IHS Markit and America’s Institute for Supply Management) interpret as indicating economic growth. Countries generally have three PMIs: manufacturing, services and a “composite” of the two (some others have construction gauges, too). Each PMI is an index that combines several categories, including new orders, employment and prices paid to suppliers. Of these, we think new orders are the most forward-looking—similar to factory orders. The composite PMI, however, measures only output, making it at best coincident. In our experience, PMIs are popular largely because they are the timeliest monthly indicator. The initial flash estimate, which IHS Markit produces for many major economies, comes out roughly three weeks into the month. The final manufacturing PMI generally comes out the first business day of the following month, with services and composite PMIs usually following two days later. We find them useful indicators, but it is important to note they don’t measure how much a given country grew—just how widespread growth was.
One other category of data getting attention lately from pundits we follow is high-frequency or real-time indicators, which hit daily or weekly. Many see these as a better way to assess COVID-19’s fast-changing economic impact. These include daily data on traffic, commercial air flight, credit card purchases, online restaurant reservations and the like. Whilst these may also be handy, they are widely followed now, and we think they serve best to help investors gauge sentiment and broad economic expectations.
Most economic data sources quote their headline numbers as rates of change—the percentage increase or decrease from a given reference period. There are four main types—month-over-month, quarter-over-quarter, year-over-year and annualised. Month-over-month is the percentage change between the reported month and the prior month. Typically, these also include what statisticians call a seasonal adjustment, which controls for weather and holidays. This way, periods that routinely see calendar-induced spikes or dips—like the sharp increase in December holiday shopping—don’t skew results. Most retail-sales and industrial-production releases use seasonal adjustments. Quarter-over-quarter—the percentage change between the reported and prior quarter—also includes seasonal adjustments. It is typically used for GDP. Year-over-year is the percentage change between the reported month or quarter and the same period a year ago. It is used in cases where there are no seasonal adjustments available. It also tends to have less variation from month to month, which some commentators prefer because it can make trends more visible. However, in our view, it also results in more backward-looking skew, which can obscure recent developments. Lastly, there are annualised rates of change—the growth that would occur over a full year if the quarter-over-quarter (or month-over-month) growth rate persisted the whole time. The US and Japan report GDP in this manner, whilst most European nations and the UK use quarter-over-quarter and year-over-year. Make sure you are using comparable rates of change when assessing data from multiple sources. For example, mixing annualised US GDP with quarter-over-quarter eurozone GDP data could lead you to the wrong conclusions.
For investors, here are some main considerations we think you should keep in mind for the next few months. Big swings, including drops, could continue. We fully expect quarterly data covering the April–June period will be awful, perhaps even history’s worst quarter of GDP data. Many analysts we follow expect US GDP, for example, to decline more than -25% annualised. But it is critical to remember these data are annualised. A drop of that magnitude is no doubt enormous, but it doesn’t mean America’s output is one-fourth smaller. Similarly, expect to see huge rebounds as economies reopen. We are already seeing this in reports of air traffic, retail sales and more. These big bouncebacks hinge on the calculation method above all else. Comparing a period of relative openness in the economy to completely shuttered conditions in say, April, is likely to drive that. It doesn’t mean the world economy is booming; it means a recovery started from a low base. Now, some pundits may see the scope of decline and/or the low-base effect we mentioned as a reason for pessimism about the future—or for markets. Yet they are only past data, which don’t predict future economic data. Nor do they tell you much about equities, which we believe tend to look forward to economic conditions anywhere from 3–30 months ahead. Ultimately, that—and future economic data—likely hinges heavily on the progress of economic reopening.
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Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.