US payrolls were revised this week, causing consternation in the financial media. However, the disappointment is that few people realize BLS data is not accurate, timely, or significant.
The BLS data, more formally known as the US Quarterly Census of Employment and Wages, is reconciled yearly against state insurance data. Remember, 50 states and one Federal government are revising the data several times before a final revision will occur in February 2025. Said differently, BLS data is not very accurate (read Scope and Exclusions), and it takes several quarters and revisions to provide anything useful. Instead, focus on government data that offers better insight, such as business inventories, compared to total corporate sales and capital business expenditures (CapEx).
Business inventories is a shortened term for the “Manufacturing and Trade Inventories and Sales,” a monthly report released by the US Department of Commerce. The business inventories report is compiled from three sources: the Monthly Retail Trade Survey, the Monthly Wholesale Trade Survey, and the Manufacturers’ Shipments, Inventories, and Orders Survey. The business inventories report aims to provide broad and timely measures of the combined changes in domestic retail trade, wholesale trade, and manufacturers’ activities. It also provides the only source of monthly data on total business activities of retail trade, wholesale trade, and manufacturers.
When business inventories are too high, a company has likely taken on more than it can handle. As inventories increase relative to total corporate sales, this detracts from future GDP because the company will need to start cutting back. Conversely, if inventories decrease relative to corporate sales, those inventories will need to be replenished, which will help increase future GDP growth.
The inventories-to-sales ratio is a respectable indicator that provides insight into whether goods production may slow or increase. An easy way to track all the underlying inventory ratios is to use the St Louis Federal Reserve’s free website (Merchant Wholesalers, Manufacturers, Retailers, and Total Business).
Secondly, pay attention to CapEx business expenditures, especially future plant capacity. CapEx are funds a company uses to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx spending is essential for companies to maintain existing property and equipment and to invest in new technology and other assets for growth. CapEx helps tell how much a company invests in existing and new fixed assets to maintain or grow its business. Overall, it’s any expense a company capitalizes or shows on its balance sheet as an investment rather than on its income statement as an expenditure.
Although CapEx can be a volatile data point, it can be a significant driver of a recession, and businesses often curb CapEx spending due to financing costs. If financing costs are prohibitive to expanding a business or carrying inventories, it becomes more likely to lead to a recession. Currently, total CapEx transactions are increasing nicely.
So, anytime the media is lamenting a specific data set, it is essential to assess the entire landscape, looking objectively at the evidence and thinking from first principles. We will keep doing so, and if we start seeing significant warning signs that may end this bull market, our pride won’t block us from saying so. But for now, that isn’t the case. Capital markets still look like they are in the continuation of a bull market. So, stay cool because there are always more bumps ahead, and stocks like to swing hard in the moment for any or no reason. But this bull market is real, with fundamental support that should carry it through the rest of 2024.
