If you noticed a lot of people at restaurants and
shopping outlets this weekend, it’s because consumers are feeling especially frisky
right now. The New Economy Index (NEI),
a reflection of the real-time state of the U.S. retail economy, hit a new
all-time high on Friday, Sept. 20. This
partly reflects the influence of the Fed’s recent decision to leave its $85
billion/month monetary stimulus intact.
As long-time readers of this column are aware, until
NEI confirms a “sell” signal the overall trend of retail spending is considered
to be up. The last time NEI gave a “sell”
signal was in early 2010, which proved to be a temporary blip in the long-term
recover that started in 2009.
A reader asks, “How did you go about selecting stocks
for your New Economy Index? Why didn’t you include Apple Inc., which is a
highly innovative company involved in new technology and over the years grew
rapidly to become the highest valued company in the world by September 2012? Since then Apple’s share price has collapsed
so it is fortuitous that it isn’t in your New Economy Index. Blackberry is another New Economy stock that
once flew high but has since fallen on hard times. Manifestly stock selection is critical in the
New Economy Index.”
Answer: I used
the following criteria for selecting NEI components back in 2007:
1.) Must be a company which provides retail employment
for millions of Americans (e.g. WalMart), or else a company which reflects the
overall employment outlook (e.g. Monster).
2.) Must be a company which adequately reflects
consumer spending patterns at traditional "bricks and mortar" outlets
(e.g. WalMart), as well as via the Internet (e.g. Amazon).
3.) Must be a company that reflects near-term shifts
in consumer spending as well as be a barometer for the small- or home-based
business community (e.g. eBay).
4.) Must be a company which is an excellent
representation of the transportation sector as it pertains to the shipment of
business products, parcels, documents, etc. (e.g. FedEx).
I briefly considered including Apple in the index, but
then I realized that Apple is only a small overall slice of the retail economy
since it represents a rather narrow industry, namely personal computers.
That's not broad enough to merit inclusion in the NEI. The other
companies in the NEI are much more diversified and provide a greater range of
services, as well as leaving a bigger footprint in the overall economy.
Even though it has been seven years since the New
Economy Index was devised, I don't think it could have been constructed any
simpler without losing its effectiveness as an economic indicator. It
still provides a good overall view of the real-time state of the U.S. retail
economy.
