199. Marianne Palmu once again answering Alokas’s unique questions about macro indicators. 
I read a lot of different macro-themed stories, though rarely any longer reports and articles, but rather news, concise articles, and highlights that feature various macro indicators. I know many of the indicators in some way and usually see whether they beat expectations and how things have gone previously, but I still don’t always truly grasp the deeper meaning of a particular indicator, whether it’s a big deal or a small one, and what to think about it in a broader sense.
Sure, there are indicators and terms I barely understand, and besides, I find some fun and intriguing quirks in them; for example, US jobs figures almost always mention “non-farm payrolls”.
I’ve pondered these “indicator things” before and wanted to get more out of them, so I decided to ask our Marianne about these themes to get wiser about them and gain “tools” to better internalize them.
1. Why specifically “non-farm”?
Question: What’s the deal with this… When people talk about the US labor market and report job figures, they often mention “non-farm payrolls”. Why specifically non-farm?
Answer
Because agricultural jobs swing wildly like a farmer’s scythe. Employment fluctuates with the seasons: during summer and harvest, a lot of hands are needed, but very few in winter. The sector is also difficult to measure because it includes many family businesses, self-employed individuals, and seasonal workers who do not appear on company payrolls. In addition, agriculture employs only about a percent or two of the US workforce, meaning its jobs don’t have a very significant impact on the overall employment picture. For the same reason, the self-employed and private household employees are also excluded from the figure. So, this isn’t about downplaying farmers in any way, but rather about filtering out excess noise.
2. Inflation vs. core inflation
Question: People often talk about inflation and then separately about something called core inflation. Why? What significance does that “core inflation data” hold for an investor?
Answer
Core inflation excludes energy and food. Their prices can fluctuate wildly due to things like war, drought, or OPEC decisions, and central banks can hardly do anything about them. Interest rates won’t reopen the Strait of Hormuz, as we’ve seen recently.
For an investor, core inflation reveals whether price pressure is entrenched in the economy. It shows up in wages, rents, and services, for instance, and that is precisely what central banks are truly monitoring. The Fed pays particularly close attention to core PCE inflation. If core inflation surprises to the upside, the market begins pricing in a “higher for longer” interest rate scenario, and that’s typically when growth stocks stumble first.
3. What constitutes a big change versus a small one?
Question: How could an ordinary investor, when looking at numbers in the financial media, better figure out how to interpret them? Rarely do figures match forecasts perfectly; sometimes they come in slightly above, sometimes slightly below. A small change isn’t news in itself, but how can one know, find out, or learn what kind of change is considered big or small, etc., for instance, if a Purchasing Managers’ Index rose from 50.8 to 51.2, or a country’s unemployment rate climbed from 6.7% to 6.9%?
Answer
A few rules of thumb will get you a long way:
• Compare the figure to the forecast, not to the previous reading. The market has already priced in the consensus forecast. The news is solely the surprise—that is, the difference between the actual figure and the estimate. For example, on Investing.com’s economic calendar, you can view the previous reading, the forecast, and the actual result side by side.
• Look at how much the indicator typically fluctuates. Check the indicator’s history on FRED (fred.stlouisfed.org), for instance, and look at the typical monthly change. A Purchasing Managers’ Index can easily move by a full point in a month, so a rise from 50.8 to 51.2 is practically moving sideways. What’s interesting is mainly that it remains above 50, which signifies growth territory.
• Look at the trend, not an isolated data point. A three-month average tells you more than a single month. For example, the Sahm Rule only signals a recession when the three-month moving average of unemployment has risen by 0.5 percentage points above its low over the previous 12 months. Such trend-based rules are excellent tools.
• Keep revisions in mind. Non-farm payroll (NFP) figures, in particular, are often revised substantially in subsequent months. Last month’s “huge surprise” might end up shrinking significantly down the road.
4. ”Okay… why should I care about this?”
Question: On a general level, how should one start researching and learning to get more value out of all the economic indicators, charts, or, say, news that the manufacturing ISM index faltered? My own reaction is quite often: “Okay… why should I care about this, or should I even care?”
Economic figures are a great way to expand your financial literacy. Here are a few ways to learn:
1. Learn a few indicators thoroughly, not all of them. A solid core set includes employment (NFP and unemployment), inflation (core inflation), purchasing managers’ indexes (ISM/PMI), and central bank rate decisions. These cover the vast majority of what moves the market.
2. Distinguish between leading and lagging indicators. PMI and its new orders component signal the direction ahead of time. Unemployment lags behind, confirming what has already happened. The closer an indicator is to real-time, the better.
3. Browse trends. When you see what an indicator looked like in 2008, 2020, and 2022, you quickly learn to tell a storm from a light breeze.
4. Accept that you don’t need to follow most of the data. For a long-term equity investor, an individual monthly figure is rarely a reason to take action. It’s worth following macro data to understand market sentiment, not because you need to react to every single release.
Thank you so much, Marianne, for your insightful answers to my questions!
Sometimes you “wake up” after reading a macro article realizing: did I actually absorb the matter, or did I just gather from the piece that economic indicators are rising and that it’s probably a nice thing? Fortunately, Marianne’s answers gave me “tools” to better understand and learn these concepts, making it considerably easier to see the essentials in macro topics.
Properly grasping the basics is important, and it helps immensely in understanding things as well as learning new concepts.
Have a great Saturday, everyone!