Last updated on November 3, 2003
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BASICS
Five Keys to the Economy
by Cameron Huddleston All those figures the government releases each month provide a pretty good gauge of where the economy is headed. And because Wall Street seems to agonize over every last decimal point, the numbers are a pretty good barometer of how your investments are going to perform, too -- at least in the short run. Yes, sometimes the indicators are pretty arcane, but you don't have to be Alan Greenspan to make sense of them. Rather than pore over every bit of economic data out there, just focus on the main indicators. In this economy, that means watching for reports related to consumer spending, employment and manufacturing.
Chuck Hill, who is director of research at First Call and writes a weekly market commentary that looks at economic trends, says the economic indicators have taken on added importance now that people are watching to see if the economy will recover. Wall Street, in particular, is paying attention, as evidenced by the swings in stock prices every time a report is released.
Below are some of the top indicators economists and market watchers are looking at now. You can see which announcements are scheduled for release and what economists are expecting at Briefing.com.
Gross domestic product
GDP is the overall measure of economic performance. In a nutshell, it encompasses everything the nation produces and consumes. If GDP declines, a red flag goes up because the economy could be in trouble. Two successive quarters of decline can signal a recession. That's why GDP figures are so important to economists and market watchers. Both the Federal Reserve Board and Congress rely on GDP reports when formulating policies related to the economy.
However, the information can be dated by the time it reaches you because the Commerce Department publishes it quarterly. Plus, the data are subject to several revisions. For example, first-quarter GDP is released in April, a preliminary revision is published in May, then a final revision is issued in June.
Personal income and consumer spending
Personal income and spending are the best indicators of how the consumer is doing and is likely to do, Hill says. If incomes are rising or holding steady, consumers probably will continue to spend -- which is of utmost importance considering consumer spending drives two-thirds of the economy. If income and spending drop, it could be a sign that economic recovery has stalled.
Personal income includes pretax income earned by individuals, nonprofit organizations and trust funds. A component of this indicator is personal consumption expenditures, or consumer spending. It measures how much consumers spend each month on durable goods (such as cars) and nondurable goods (such as food and clothing). The Commerce Department releases these figures the fourth week of each month, the day after GDP figures are published, but the data are from the previous month.
Consumer attitude indexes
Two monthly indicators reflect consumers' attitudes about the economy and their own financial condition: the consumer confidence index and the consumer sentiment index. The Conference Board publishes consumer confidence index figures the last Tuesday of the month (the survey is completed earlier in the month). The University of Michigan provides consumer sentiment figures five to ten days into each month (the survey is completed the previous month). Both measure the same thing but use different methodologies.
Market watchers and economists pay attention to these indicators because when consumers are optimistic, they're more willing to spend. And they're more likely to cut back if they're pessimistic.
But consumers don't always do as they say, says Richard Yamarone, chief economist for Argus Research. That's why these indicators are more like a barometer: They're good for predicting shifts in future spending but aren't an indication of what spending levels will be.
Employment
The Labor Department releases several employment reports, including weekly claims for jobless benefits (on Thursdays) and the monthly unemployment rate. Economists are watching closely to see if jobs are being added -- a sign the economy is growing. Employment rates are also closely tied to personal incomes and consumer spending (no job = no income = no spending).
Manufacturing
Industrial production parallels overall movement in the economy, Yamarone says. When orders for goods rise, output usually increases and factories hire more employees. Then unemployment declines, spending increases and consumers' outlook on the economy brightens.
The Commerce Department provides a monthly measure of manufacturers' orders for durable goods -- items made to last three years or longer. A rise in durable goods orders can signal that businesses and consumers are increasing their spending -- a sign of economic growth.
Another closely watched indicator is the Institute for Supply Management's monthly purchasing managers index -- a composite of new orders, production, employment, promptness of manufacturers' deliveries and inventories. Economists use PMI to forecast manufacturing recessions or recoveries.
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