Each month the U.S. government issues reports about the state of our economy. How do those conflict with the quarterly reports of major public companies and what, ultimately, do they tell us? I asked Zachary Karabell, president of River Twice Research, about a column he wrote in the latest issue of Time magazine that tackled this topic.
Chris Hill: You've got the jobs report that comes out in early July and the Labor Department says continued weakness and unemployment, and obviously there is a lot of worry about the economy in general. Then July 20th, Apple (Nasdaq: AAPL ) comes out with their quarterly earnings and it's a blowout quarter. They sell more than eight million iPhones, more than three million iPads. Which one tells you more about the state of the economy?
Zachary Karabell: I wrote something about this years ago, but continue to hammer it, but there is no "The Economy". We talk about this thing as if you can create a nice, simple, synthetic statistical snapshot, and that is part of the problem. They each tell you something very meaningful about substantial segments of the American economy and they also tell you something meaningful, but not quite as meaningful about this global system, which involves multiple different economies interacting. Part of our limitation these days is that we keep trying to come up with one simple snapshot of "us", and it doesn't make a lot of sense anymore.
Hill: There are other companies that you cite, like Nintendo and Coach (NYSE: COH ) . These are companies that have had really good sales the last couple of years, but they are not companies that are producing staples that people need. As investors, should we almost be weighing the quarterly reports of companies like that against companies like Target (NYSE: TGT ) , Wal-Mart (NYSE: WMT ) , Johnson & Johnson (NYSE: JNJ ) that make and sell more essential products?
Karabell: Yeah, to some degree. First of all, companies in general, even if they are in the unsexy business of selling sundries, are doing a lot better than any national economy because companies get a lot of the benefits of cheap capital and global supply chains and emerging world growth and very few of the things that weigh down national economies like health care costs and unemployment benefits and defense budgets. So basically companies are always going to look better than the national economic units that they are nominally a part of.
Then as you said, they are different kinds of companies and they tell you different things, but I wouldn't go too far with that because Target might do badly, but Wal-Mart may do well. Some of it is going to be very company specific about how they are managing their business separate from underlying trends. And Wal-Mart is not going to suddenly do amazing if the economy, economic activity in general, picks up. They may do worse as people go somewhere else.
Hill: You focused on the jobs report, but there are so many government reports that come out about the economy, and of course, these reports tend to get revised over time. As an economist and as an investor, what is the most meaningful government report to you? What is the most important one for investors to pay attention to, in your opinion?
Karabell: None of them, but I think the underlying raw data that is accessible with the release of all these reports, and granted it takes a lot of time and effort to comb through, can be meaningful. So the jobs report creates a synthetic and in many way, problematic number called the unemployment rate, right? And we all know, if you look into it, it is a heavily manufactured number. But then if you look at the raw data behind it, about where pockets of strength or weakness are and how things vary greatly by income level and education level and geography and race and all these things, that presents a more compelling picture of what is going on in the world.
That is the problem with our job statistics and it is the problem with a lot of our statistics. We live in a world of huge disparities of what is doing well and who is doing well and where it is doing well. The point about looking at the two jobs reports is there is a big, big, big portion of this country that isn't only doing well, but spending a lot of money on kind of fun, cool stuff that suggests that they have got a lot of money to burn. It is probably impolitic to talk about that in politics because it seems unseemly to focus on those doing just fine in a world where many aren't, but it definitely skews our perspective, the amount of attention we give to areas of glaring weakness rather than profoundly potent areas of real strength.
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