Almost everyday, there is some economic statistic or number that media pundits discuss as either good for the markets or bad for the markets. It makes sense for investors to have a basic understanding of how the economy works and how economic activity is measured. While we focus and monitor the numbers from month to month, we thought it would be informative to give you a breakdown of the key economic indicators for your reference:
Business Inventories: A monthly running total of how well companies are selling their products, business inventories are a signal to economists. The business inventory data is collected from three sources: the manufacturing, merchant wholesalers, and retail reports. Retail inventories are the most volatile component of inventories and can cause major swings. A sudden fall in inventories may show the onset of expansion and a sudden accumulation of inventories may signify falling demand and hence onset of recession.
Gross Domestic Product: The gross domestic product (GDP) is the most important economic indicator published. Providing the broadest measure of economic activity, the GDP is considered the nation's report card.
The four major components of the GDP are: consumption, investment, government purchases, and net exports. As the barometer of the nation's total output of goods and services, GDP is the broadest of the nation's economic measures.
Consumer Price Index (CPI): The consumer price index (CPI) is considered the most important measure of inflation. It compares prices for a fixed-list of goods and services to a base period.
Unlike other measures of inflation, which only cover domestically-produced goods, the CPI covers imported goods, which are becoming increasingly important to the U.S. economy.
Job Growth: Except for the GDP, the government's employment report is the most significant economic indicator reported, setting the tone for the entire month, providing information on employment, the average workweek, hourly earnings, and the unemployment rate.
Consumers feel more at ease and more confident when the job market is expanding. But when job growth contracts to 100,000 or less month to month, it typically means a recession or slow growth for the economy.
Consumer Confidence: The Conference Board maintains this index of consumer sentiment based on monthly interviews with 5,000 households.
In bad times or good, consumer confidence serves as a reflection of the nation’s financial health. Sometimes the consumer worries about inflation more than unemployment, and at other times the reverse is true. Consumer confidence is far more important to the financial markets during times of national crisis or panic and recessions.
As might be expected, consumer confidence is the weakest during recessions, slightly better on average during recoveries, and highest during expansions (like the decade long bull market of the 1990’s.
Unemployment Index: The government's employment report covers information on payroll jobs, including employment, average workweek, hourly earnings, and unemployment. Unlike the jobs data, which is a coincident indicator of economic activity (it changes direction at the same time as the economy), the unemployment rate is a lagging indicator. It increases or falls following a change in economic activity.
Housing Starts: This indicator tracks how many new single-family homes or buildings were constructed throughout the month. For the survey each house and each single apartment are counted as one housing start, (a building with 200 apartments would be counted as 200 housing starts). The figures include all private and publicly owned units, with the only exception being mobile homes which are not counted.
Most of the housing start data is collected through applications and permits for building homes. The housing start data is offered in an unadjusted and a seasonally adjusted format. Declining housing starts show a slowing economy, while increases in housing activity can pull an economy out of a downturn.
Index of Leading Economic Indicators: The index of leading economic indicators (LEI) is intended to predict future economic activity. Typically, three consecutive monthly LEI changes in the same direction suggest a turning point in the economy. For example, consecutive negative readings would indicate a possible recession.
