economic indicators to watch - Janney Montgomery Scott LLC

August 2017

ECONOMIC INDICATORS TO WATCH By Jody Lurie, CFA

Oftentimes investors are overwhelmed with the amount of economic data that floods the financial markets. Below we provide a short list of economic indicators to watch, in addition to a robust glossary of additional important indicators, along with their limitations. The report can serve as a reference for investors who may be less fluent in the financial markets. 1. ECONOMY Gross Domestic Product (GDP) – As the cornerstone of a country’s economic data, GDP is the dollar amount of goods and services produced in a country during a specific period and a proxy for the size of the country’s economy. The quarterly GDP numbers (an initial number followed by 2 revisions), provided by the US Bureau of Economic Analysis, frame market discussions about economic health in comparison to prior periods. When GDP growth accelerates, inflationary concerns often surface. Personal Consumption Expenditure (PCE) – A main component of GDP is personal consumption: how much households spend on durable and nondurable goods, as well as services. The measure accounts for two-thirds to about 70% of the total US GDP and shows how much of income households are spending, as well as the categories of spending. PCE data is released monthly by the US Bureau of Economic Analysis, and limitations include the type of services and expenses, along with certain transactions, not captured. Economists often focus on the PCE price index (aka PCE price deflator), which is a measure of inflationary trends. 2. EMPLOYMENT Unemployment Rate – The U-3 measure is the most widely cited unemployment number. It depicts the number of people in the US non-military labor force who are unemployed and have looked for a job in the past four weeks. While it is the headline number for the US Bureau of Labor Statistics’ unemployment data upon which markets focus, many articles and research reports often discuss the flaws of the measure in its narrow definition of a person who is unemployed versus other more inclusive measures. Nonfarm Payrolls – The monthly nonfarm payrolls numbers published by the Bureau of Labor Statistics measures the change in employment across industries (except farming, self-employed, and military jobs). Bond and equity market professionals watch the release closely, despite its limitations in terms of industries captured and the way in which the data is calculated and extrapolated (i.e. methodology of surveying select number of businesses). Jobless Claims – This weekly initial jobless claims report, published by the US Department of Labor, provides data on the number of unemployment insurance claims received by each state’s unemployment office. It is a method of monitoring labor market conditions on a more regular basis than monthly unemployment data and is classified as a leading economic indicator. Pitfalls include differences by state in a person’s eligibility for insurance and claims not necessarily equaling unemployment. 3. INFLATION CPI – The consumer price index measures the average change over time in prices paid by urban consumers for a market basket of consumer goods and services. It uses a base period to show change, which represents the rate of inflation. It is one of the most widely used measures of inflation, and the Bureau of Labor Statistics publishes the data monthly. Limitations of the data include outside factors affecting the prices of goods and services monitored, the lag in incorporating newer goods that become common, and substitution effects related to changes in prices of goods and services relative to one another.

SEE PAGE 6 FOR IMPORTANT INFORMATION REGARDING CERTIFICATIONS, OUR RATINGS SYSTEM, AS WELL AS OTHER DISCLAIMERS JODY LURIE, CFA

DIRECTOR, CORPORATE CREDIT ANALYST

[email protected] 215.665.6191

WWW.JANNEY.COM © JANNEY MONTGOMERY SCOTT LLC MEMBER: NYSE, FINRA, SIPC

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4. LEADING INDICATORS Leading Economic Index – The Conference Board publishes the leading economic index monthly, as a composite of several individual leading indicators. It is designed to signal peaks and troughs in the business cycle through aggregating various data points into one index, which is meant to smooth out volatility shown in any one indicator. Limitations include that backwards adjustments of underlying indicators may skew the data and trend, and the index does not adjust for inflation or population growth. 5. ECONOMIC OUTLOOK Consumer Confidence – The index reflects consumers’ attitudes and buying intentions to show economic development and business conditions near-term. The index moves based on a random sample of consumers’ responses to a survey about expectations over the next 6 months about business, employment, and income. Debates exist among economists over whether it is a leading or lagging indicator. It is a useful measure taken in conjunction with other indicators, but individual data points may be less telling. The Conference Board publishes the index monthly. Consumer Sentiment – Like the consumer confidence index, the consumer sentiment index utilizes a random selection of consumers to answer questions related to expectations about near-term economic growth, along with consumer spending versus savings. The index is a measure of consumer optimism. Also like the consumer confidence index, it is a useful measure taken in conjunction with other indicators, but individual data points may be less telling. It is published monthly by the University of Michigan. Business Confidence – The National Federation of Independent Business publishes the small business optimism index monthly. It is a composite of 10 components (e.g. hiring and capital deployment expectations) based on a survey of 620 small businesses (and members of the index compiler). Small businesses are notable contributors to job openings, so movements in the index can point to near-term hiring trends and economic expansion. Limitations include the sampling of only NFIB member firms, restricting sampling and possibly skewing results.





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APPENDIX OF ECONOMIC INDICATORS ECONOMIC EXPANSION: Gross Domestic Product (GDP): Total dollar amount of all goods and services that a country produces within the country’s borders in a given period; rising GDP of 2-3% reflects economic growth with limited risk of inflation; smaller or decreasing GDP growth can portend a recession (defined as being two or more consecutive quarters of GDP contraction) Limitations: Does not account for effect of new developments and technology, amount of labor required for production, transactions that are not officially recorded (e.g., transfer payments, nonfinal goods), sale/resale of goods from prior periods, environmental effects, leisure time, production not on country’s soil, and non-market production (valuable goods that are not sold); does not account for standard of living Beige Book: Reports current and future economic trends; includes information on current economic conditions in the 12 Federal Reserve Districts Limitations: Does not report new data; anecdotal evidence and qualitative slant Balance of Payments: Records a country’s transactions with the international community (including trade in goods and services, receipts and payments of income, capital-account transactions, and transactions in financial assets and liabilities) Limitations: Does not include cash payments made to different countries

Occurrence: Quarterly Indicator: Lagging Source: Bureau of Economic Analysis

Occurrence: 8/year, 2 weeks before FOMC meeting Indicator: Lagging Source: Federal Reserve Occurrence: Quarterly Indicator: Lagging Source: Bureau of Economic Analysis

Related Measurements: Gross National Product – Total dollar amount of all goods and services that a country produces, including goods and services produced by the country’s citizens abroad Import and Export Price Indexes – Changes in the price of goods that are imported and exported US Treasury Monthly Budget Statement – Government revenues and government expenditures, determining a budget surplus or deficit EMPLOYMENT TRENDS: Nonfarm Payrolls: Measures the change in employment across industries (except farming, selfOccurrence: Monthly employed, and military jobs); increase indicates economic expansion, while decrease indicates Indicator: Coincident economic contraction Source: Bureau of Labor Statistics Limitations: Does not include all industries; volatile; subject to adjustments after initial data is released; data collected via a survey of 147,000 businesses and government agencies Occurrence: Monthly, first Friday Unemployment Rate: Measures the share of unemployed people in the labor force, expressed as Indicator: Lagging a percentage; labor force only includes people who are actively seeking jobs Source: Bureau of Labor Statistics Limitations: Does not include unemployed individuals who have stopped looking for jobs (discouraged workers), underemployed individuals, and labor force participants who do not fit in the narrow definition Related Measurements: Labor Force Participation Rate – Percentage of working age people who are employed plus those actively looking for work Underemployment Rate – Percentage of workers whose jobs do not utilize the workers’ full potential ADP National Employment Report – Measures non-farm private sector employment based on payroll data Jobless Claims Report – Weekly number of unemployment insurance claims received by each state’s unemployment office Employment Cost Index – Quarterly compensation change for civilian workers in the US Job Openings and Labor Turnover Survey (JOLTS) – Demand of labor in different industries via job availabilities SEE PAGE 6 FOR IMPORTANT INFORMATION REGARDING CERTIFICATIONS, OUR RATINGS SYSTEM, AS WELL AS OTHER DISCLAIMERS JODY LURIE, CFA




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INFLATION: Consumer Price Index (CPI): Measures inflation from the consumer’s perspective through price changes of a basket of common, household goods that are divided into eight categories: transportation, housing, apparel, recreation, education, food, medical care, and other goods/services Limitations: Limited to fixed basket of goods used, differing demographic group data, or ability of consumers to substitute more expensive products for cheaper ones; does not adjust for changes in consumer behavior or changes for the short-term

Occurrence: Monthly Indicator: Lagging Source: Bureau of Labor Statistics

Producer Price Index (PPI): Measures inflation from the producer’s perspective through price changes of goods; can foreshadow CPI as cost increases for producers and retailers lead to cost increases for consumers. The PPI tracks industries that produce goods, including manufacturing, agriculture, and construction Limitations: Certain industries like energy and food can alter data; does not include all industries; CPI used more often, although rates should be similar in the long run

Occurrence: Monthly Indicator: Lagging Source: Bureau of Labor Statistics

Money Supply: Measures the amount of currency and liquid instruments in the economy available at a given time (M1: cash, checking deposits; M2: M1 plus savings deposits, money market securities, and mutual funds; M3: M2 plus long term deposits). Money supply is a good indication of inflation and consumer spending Limitations: M1 and M2 do not include debt and equity securities

Occurrence: Weekly on Thursdays Indicator: Lagging Source: Federal Reserve

Personal Consumption Expenditures Index: Measures inflation and consumer spending through price changes in a wide variety of consumer goods and services Limitations: Predictable; some prefer CPI

Occurrence: Monthly Indicator: Lagging Source: Bureau of Economic Analysis

Related Measurements: Big Mac Index– Uses the McDonald’s Big Mac as a measure of currencies via purchasing power parity. In theory, a Big Mac should cost the same in all countries, otherwise a currency is under- or overvalued; can be a gauge of inflation in reviewing price changes year over year in each country Personal Income and Outlays – Consumers’ behaviors and economic consumption via individual wages, dividends, interest, and other income earned, as well as spending and payments CONSUMER & BUSINESS OPTIMISM: Consumer Confidence Index: Measures consumer expectations of the economy, including views on business, employment, and income over the next six months; optimistic beliefs (above 100) imply a rise in spending and economic growth, while pessimistic beliefs (below 100) the opposite Limitations: Does not include reasons for consumer optimism or pessimism Other Information: Based on a five-question survey given to 5,000 households University of Michigan Consumer Sentiment Index: Measures consumer expectations of the economy, including views on personal finance, the short- and long-term health of the US economy; positive index implies increased spending and economic expansion, while negative the opposite Limitations: Difficult for consumers to accurately predict economic conditions; volatile Other Information: Based on 50-question phone survey given to at least 500 households. The index is calculated as the percentage of favorable consumer replies less the percentage of unfavorable ones

Occurrence: Monthly Indicator: Leading Source: The Conference Board

Occurrence: Monthly Indicator: Leading Source: University of Michigan





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Consumer Credit: Measures changes in dollar amount of outstanding loans to individuals, which are mainly used to purchase consumer goods; predicts consumer spending in the future Limitations: Only measures total growth of outstanding loans; does not include details about the state of individuals’ loans; does not include home-equity debt; lag in data’s release vs other data

Occurrence: Monthly Indicator: Lagging Source: Federal Reserve

Small Business Optimism Index: Measures small business owners’ plans for the future in terms of employment and spending as well as opinions about future economic conditions; affects number of new jobs and equity market Limitations: Only uses data from small businesses; subjective (sentiment-based)

Occurrence: Monthly Indicator: Leading Source: National Federation of Independent Business

MANUFACTURING: Purchasing Managers’ Index (PMI): Measures the economic state of the manufacturing sector through over 400 surveys based on new orders, inventory levels, production, supplier deliveries, and the employment environment; values above 50 imply industry and economic expansion Limitations: Only includes the manufacturing sector; subjective; similar regional reports reduce its significance

Occurrence: Monthly, first business day Indicator: Leading Source: Institute for Supply Management

Capacity Utilization Rate: Attempts to capture sustainable maximum output in manufacturing, mining, and utilities to determine production volumes; over the 1972–2015 period, none of the broad aggregates has ever reached 100%, and averages hovered near the 80% level Limitations: Service industries not included; difficult to create estimates and compare with historical data since manufacturing industry has decreased, difficult to quantify non-physical goods

Occurrence: Monthly, middle of the month Indicator: Coincident Source: Federal Reserve

Related Measurements: Non-Manufacturing Report on Business – Economic state of the non-manufacturing sector, including the service industry, based on data from purchasing and supply executives Industrial Production Index – Output of the manufacturing, mining, and utilities industries RETAIL: Retail Sales: Measures the dollar amount of durable and nondurable goods and related services sold by a wide range of retailers over a given period; high retail sales could indicate inflation and economic expansion, while low retail sales an economic slowdown or contraction Limitations: Automobile sales are a high proportion of data, so an “ex-autos” figure is tracked; retail sales are volatile; most services not included; does not account for inflation; revised reports can differ from initial data Durable Goods Orders: Measures the dollar amount of new orders from manufacturers for goods that have a useful life of at least three years; elevated number of new orders means high business demand and industry growth Limitations: Volatile; notable revisions; data released as early estimate and again in the factory orders report two weeks later; measured in nominal dollars HOUSING: Existing Home Sales: Measures the price and quantity of single-family homes (including condos and co-ops) resold each month; measures real-estate demand Limitations: Seasonally adjusted data also available; does not include newly built houses or sale of new houses

Occurrence: Monthly, mid-month Indicator: Leading Source: Census Bureau and Department of Commerce

Occurrence: Monthly Indicator: Leading Source: Census Bureau

Occurrence: Monthly Indicator: Lagging Source: National Association of Realtors





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Pending Home Sales: Measures the number of signed real estate contracts for existing singlefamily homes, condos, and co-ops; leads existing home sales data Limitations: Seasonally adjusted data also available; does not include reasons for prolonged pending transactions or multi-family home pending sales

Occurrence: Monthly Indicator: Leading Source: National Association of Realtors

New Home Sales: Measures the median and average prices, as well as quantity of single-family houses that were sold during the first or second year after being built; measures real-estate demand for newly built homes; affects mortgage rates Limitations: Seasonally adjusted data also available; data differs from new residential construction due to difference in classification of inventory (i.e. built for sale vs built for other uses)

Occurrence: Monthly Indicator: Lagging Source: Census Bureau

S&P/Case-Shiller Home Price Index: Tracks the change in value of residential real estate nationally and in 20 cities; focuses on single-family housing within the US Limitations: Does not include multi-family homes, new homes, or condos; data can be inaccurate for large cities; bias towards urban areas

Occurrence: Monthly Indicator: Lagging Source: Standard & Poor

Related Measurements: MBA Purchase Index – Measures the weekly change in the number of home loan applications New Residential Construction Report – Measures the number of building permits, initial construction, and completed construction of new housing units by region and nationally; includes details on housing starts and building permits Construction Spending – Estimates the dollar amount spent nationally on new construction each month Analyst Certification I, Jody Lurie, the Primarily Responsible Analyst for this report, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject sectors, industries, securities, and issuers. No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Janney Montgomery Scott LLC (“Janney”) Debt Research Disclosure Legend Janney may seek compensation for investment banking services for any company in this report in the next 3 months. The research analyst is compensated based on, in part, Janney’s profitability, which includes its investment banking revenues. Additional information available upon request. Disclaimer Janney or its affiliates may from time to time have a proprietary position in the various debt obligations of the issuers mentioned in this publication. Unless otherwise noted, market data is from Bloomberg and Janney Investment Strategy Group (Janney ISG). This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s express prior written consent. This report has been prepared by Janney and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. The information presented herein is taken from sources believed to be reliable, but is not guaranteed by Janney as to accuracy or completeness. Any issue named or rates mentioned are used for illustrative purposes only, and may not represent the specific features or securities available at a given time. Preliminary Official Statements, Final Official Statements, or Prospectuses for any new issues mentioned herein are available upon request. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, as well as operational or financial conditions of issuers or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. We have no obligation to tell you when opinions or information contained in Janney ISG publications change. Janney Investment Strategy Group does not provide individually tailored investment advice and this document has been prepared without regard to the circumstances and objectives of those who receive it. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. For investment advice specific to your individual situation, or for additional information on this or other topics, please contact your Janney Financial Consultant and/or your tax or legal advisor. Investing in high yield bonds entails significant risk. Please read additional information and disclosures about these risks prior to purchasing any high yield security.





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