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.