The Release:
How Economic News is Created
by Corey Casilio

After reading the morning paper from a national syndicated publication or just your local periodical, have you ever curiously wondered what procedures are followed to facilitate the release of the information you just read? The information specifically referenced in this news letter has to do with economic statistical data releases. After all, at least four key economic indicators are released on a weekly basis, forty three every month, and nine each quarter.

Take, for example, the monthly employment report released by the Bureau of Labor Statistics, Department of Labor. This economic indicator is the most eagerly awaited news on the economy each month. Are jobs being created? Have hourly wages gone up, or did they drop? Has the average work week increased or decreased? Let’s face it, we are talking about American workers and the fact that they are the life blood of the U.S. economy.

On the first Friday of each month, a select group of two dozen men and women start their morning off by participating in a special ritual in Washington D.C. Each of them make their way to a white-stone building on 3rd Avenue and C Street in the heart of our nation’s capital. Armed guards meet them at the entrance for a security check and from this point on, everyone has to wear their ID tags at all times. They proceed into a stark room with two dozen basic orange and chrome chairs, accompanied by a row of narrow cubicle-like desks. High on the wall, a digital clock breaks down time to the second. The time is 7:30 a.m., with half the participants already in the room and the rest arriving shortly, anticipation mounts as they keep a keen eye on the time. At 7:55 a.m., a government official walks in and picks up a wall phone to call the Naval Observatory, home to the Vice President of the United States and the location of the ultra-accurate atomic clock. The government official then inserts a key into a lock on the wall, which allows him/her to adjust the digital clock to the precise second. The official then announces to the participants, “Please turn off all cell phones and other communication devices, and disconnect laptops from your telephone lines.”

At precisely 8:00 a.m., the door to the room locks shut, and from this point on, all the individuals inside are relinquished of all contact with the outside world. No other participants are allowed access and no-one is allowed to leave. Why all the precautions and why all the secrecy? Is Homeland Security conducting a meeting with Congressional investigators about the possibility of a terrorist attack? Did NASA discover life on another planet? No, the government is about to release economic statistics. The participants in the room are business reporters representing news organizations from around the world, and this morning they are working out of the Department of Labor’s secure pressroom. Within the next half hour these journalists will be the first to see the most sensitive economic data release for the U.S. economy – the monthly report on employment conditions.

For investors and professional money managers, the information in the jobs report can mean the difference between having a winning or losing portfolio. Given the sensitivity of the data, the government guards this data and dozens of other key economic indicators as tightly as a military base. These procedures prevent the abusive behavior investors could act upon by gaining access to the information before it is disseminated to the public.

Once the door shuts at 8:00 a.m., reporters dive into the latest release on employment conditions, they have until 8:30 a.m. to read, analyze, and prepare their stories on how the job market changed during the previous month. Prior to arriving, this morning most journalists have spent the last couple of days surveying various economists, portfolio managers, and strategists opinions of what they were expecting from the employment report. Most were expecting the report to show signs of continuing employment losses as has been the case over the last couple of months with the economy continuing on its contractionary path. As the journalists scourer the report, they become stunned by the details. Contrary to the consensus opinion, employment has picked up. Companies have hired workers and it appears as if the economy is showing signs of expansion with job growth increasing and the average work week ticking higher. As time passes, journalists attempt to find the words to alert the public about the surprising news and ponder how this new unexpected information will affect the stock, bond and currency markets. At 8:28 a.m., a Labor Department worker notifies television reporters that they can now leave under escort to prepare for their live 8:30 broadcast of the jobs report. 8:29 a.m. “One minute. You can open your telephone lines – But Do Not Transmit.” Reporters and journalists are now putting the finishing touches on their report, tweaking a word here or there, checking their facts, and revising the headline to their story. Money managers and traders around the world in New York, Chicago, Hong Kong, London, Paris, Frankfort, and San Ramon, CA are tuned into their computer screens anxiously awaiting the release. Many have made investment decisions and positioned billions of dollars in their portfolios to take advantage of a move in the market based upon what they expect from this release.

8:30 a.m. “Transmit!” Reporters hit the send button on their keyboards. News carriers around the world including Bloomberg, AP, and Reuters release their stories and television stations such as CNBC, Bloomberg TV, CNN, and MSNBC, broadcast the report live. The shocking news has finally been released to the public, “Unemployment unexpectedly falls. U.S. jobs increase over the previous month indicating economic expansion may be underway.” In the bond pits at the Chicago Board of Trade (CBOT), where U.S. Treasury bonds and notes are traded, chaos breaks out. Most bond traders and portfolio managers positioned billions of dollars to take advantage of an increase in bond prices and a fall in interest rates as they expected unemployment to continue to rise implying a slowing or contracting U.S. economy. Less people would have jobs which would lead to lower consumer spending and reduce inflationary pressures keeping interest rates low for the immediate future. Instead, companies have hired more workers which lead to higher consumer spending and higher household income. Now floor traders are panicking trying to cover or unwind their previous bets, flailing their arms in the air, screaming at the top of their lungs, and making every hand signal imaginable trying to reposition themselves to stop the sea of red that has overcome their portfolio.

Equity market investors have also taken their allotted thirty seconds to digest the news release and get in on the action. With a lower unemployment rate investors become more bullish on the outlook for the U.S. economy and the domestic equity market. But, the New York Stock Exchange, the world’s largest marketplace for equities, does not begin trading for another hour at 9:30. Meanwhile, portfolio managers rush to buy stock index futures on the Chicago Mercantile Exchange (CME), where S&P 500 and NASDAQ contracts are traded electronically virtually twenty-four hours a day, five days a week. Let’s not forget about what may be transpiring over at the New York Mercantile Exchange where commodity specialists are gauging the repercussions of a hot employment report. More jobs, higher household income, higher consumer spending all imply perhaps higher demand for oil and food consumption. More individuals driving to and from work increasing the demand on gasoline consumption. Higher factory output and a longer work week means higher demand for electricity because factories will be working longer shifts. The higher jobs report encourages shopping, while travel and tourism may pick up which increases demand for jet fuel as airline transportation picks up.

All the while, the currency markets in Europe and Asia are adjusting for the unexpected pick up in job creation as they now view the dollar as a more attractive currency to own. Given that consumption drives 70% of production in the U.S. and more jobs implies higher consumption, foreign investors are encouraged by the expectation of stronger growth and higher return on investments.

This newsletter covered most of the major markets and their initial reaction to the data release and an expected reaction to an unexpected data release. The scenario described in this newsletter is highly subjective to where the U.S. economy is in relation to the current business cycle. But, there still remains other beneficiaries of a better than expected economic data release. Back in Washington, hours earlier a representative from the Labor Department delivered an advance copy of the employment release in a sealed package to the president’s top economic adviser. White House officials have already been deliberating over how they may be able to spin the upbeat news for political gain to their respective parties. Perhaps the most important institution to evaluate the effects of this latest release is the Federal Reserve who is also garnered early access to the release. They get together in a small informal panel to assess the implications this may have on inflation and any stress or imbalances this may create for other parts of the economy.

What about the vast majority of Americans? Have they been eagerly awaiting the release of this report on the first Friday of every month? Have they spent hours upon hours combing through other economic releases and running regression models to forecast this expected outcome which most of the best forecasters in the world consistently get wrong? Not likely. The majority of Americans are reading the morning paper, getting the kids ready for school, eating breakfast or trying to finish up some household chore that they have left on the back burner for the last two weeks. Just because the majority of Americans are not glued to their computer terminals at the time of the release does not mean they are unaffected by the outcome. Everyone in the country in some manner will be touched by what transpired in the financial markets after the jobs report went public. A report such as the example referenced in this newsletter will have favorable and unfavorable developments. As we discussed, more jobs implies certain benefits: higher consumer spending, the government spends less on unemployment benefits which ease the strain on the federal budget helping to keep taxes lower, and companies increase output as demand for their goods and services increase the demand for labor. A stronger U.S. currency is good for American consumers because it lowers the price of imports such as foreign made cars and international travel. Now for the bad news. Recall that the bond market sold off on the better than expected report which caused interest rates to increase. This will ripple through the parts of the economy that effect the vast majority of Americans who are borrowers. As the cost of credit increases banks and other lenders increase the interest rate at which they will extend loans to individuals for mortgages and car loans. Also recall the effect that transpired in the commodity markets with oil and gas prices increasing along with agricultural goods. This will shortly spill into the retail sector, which leads to higher prices at the gas pumps for motor vehicle drivers, and homeowners and renters will shell out more for heating oil.

Valentine Capital Asset Management hopes we were able to provide you with a little more insight into how the economic releases you read in the papers everyday are made available to the public. As well as why all this action and reaction can be triggered by just a single statistic. If you multiply that by more than 50 economic indicators that are released every week, month, or quarter, you begin to understand why the stock, bond, and currency markets are in a perpetual state of motion.

Corey Casilio as an Investment Advisor Representative with Valentine Capital Asset Management and a Registered Representative of Securities America, Inc.