Bottom Up Economics vs. Government Data

Have you ever said to yourself, “That doesn’t look right,” after government data is released?  The release of economic data by government agencies is often highly anticipated by investors and can cause sharp reactions in financial markets. Over the years, I have found that government data often conflicts with what I’m witnessing in the real world and with the companies I follow. In fact, the government acknowledges their initial data is just an estimate, as most economic data is eventually revised to more accurately reflect reality, with many adjustments differing considerably from the original data. Even if adjustments are significant, financial markets seldom readjust proportionately to data revisions versus movements seen on the day of the initial release. Further increasing chances of faulty data, is the fact that there is often subjectivity involved in the calculation of the economic data (i.e. lowering inflation data due to the government’s opinion on improvements in quality of a product, or the birth death model in the employment report – government attempt to estimate how many jobs were created by business start-ups).  And there are seasonal adjustments as well that few market participants fully understand. In effect, economic data can be smoothed just like corporate non—GAAP earnings!

I have an easy solution. Stop relying on government economic data to make investment decisions. Why would an investor use data that is initially inaccurate and by the time it is accurate it is stale and possibly irrelevant? Instead of relying on data that will eventually be revised and is often subjective, why not pay more attention to what is going on in the real economy? Go straight to the source. I prefer getting my economic data directly from businesses. Specifically, I use my 300 name possible buy list, or the companies I actively follow, as a way to continuously monitor the economy in real time. So when the government says the economy is booming, I can verify or dismiss their data with timely and actual corporate results. I found this very helpful in spotting and preparing for the 2008 financial crisis before the government data (and Federal Reserve) caught up with what was happening in the real world.

As earnings season begins, we’ll soon have many new data points to help us form our opinion on the economy. A fresh data point on the industrial economy came out today with Fastenal’s (FAST) earnings report. FAST is a high quality distributor of industrial and construction supplies. I have found FAST conference calls and earnings reports helpful as they often go into considerable detail and provide a good overview of industrial and construction economies. I’d much prefer reviewing FAST’s quarterly results to determine the health of the industrial economy than relying on government industrial production data! It’s more timely and hard data. Management goes into detail on monthly trends as well. For FAST, I particularly like to review their sales trends of distribution stores open over five years, which better resemble economic activity than newer stores. April was +2.1%, May -0.4%, and June -1.8%. FAST has been experiencing weaker than normal growth as soft industrial demand continues to weigh on results. Management noted, “The decline in daily sales growth in May and June of 2016 was driven by continued weakness with our manufacturing and construction customers.” Regardless of what government economic data suggests, I expect this macro trend continued in Q2.