Markets Versus Economy

We frequently refer to the fact that the stock market does not represent the economy. The stock market is looking towards the future but the economy looks at where we are today. Forecasters try to extrapolate the current data to predict the future of the economy. What if the current data is limited?

Measurements used about the economy are based largely on manufacturing. Publicly traded companies, including most manufacturing companies, submit data as part of their reporting requirements. This data becomes one of the sources for economic information and is used to measure the current economy and make forecasts.

Several factors are influencing why the economic data is not representative of the economy.

• There is a shift in the economy from manufacturing to service. According to a study by Frederik Schlingemann of the University of Pittsburgh and René Stulz of Ohio State University, in 1973 manufacturing employed 30% of workers. The employers were primarily publicly traded companies. The share of manufacturing workers declined 75%.
• Since the 1970s, employment in the service sector rose over 200%.
• Many service companies are not publicly traded companies so data is hard to find.
• Private equity (think start-ups; pre-IPO) companies also employ many workers – again not accounted for in the economic data usually gathered from publicly traded companies.

With the source of economic data provided by publicly traded companies declining, it is difficult to make predictions that are based on the broad economy. We aren’t economists but we assume many in the profession are looking at ways to obtain information for better predictions that encompasses the broad economy – not just manufacturing.

In the meantime, the stock market moves in its own way looking into its crystal ball for the future.