U.S. economic indicators are regular fodder for the news. Market watchers anxiously await the next report to get a feel for future economic trends. But how familiar are you with the definitions?
To be a prudent investor, you need a clear understanding of the economy and how it works. Here is a description of some of the more important economic indicators:
- Gross Domestic Product: The Bureau of Economic Analysis provides this quarterly report. GDP offers the proverbial big-picture look at the U.S. economy. It measures the value of all goods and services produced in the United States during a calendar year - minus exports, government spending and products made by U.S. companies in foreign markets.
When GDP increases, the economy is said to be growing or expanding; a GDP decline signals a slowing or decelerating economy. When GDP declines for two consecutive quarters, it triggers economic recession concerns.
- Consumer Confidence Index: This provides an idea of how Americans feel about the current economy and future expectations. Published monthly by the Consumer Research Center of the Conference Board, it's based on a sample of 5,000 U.S. households.
When people are positive about the economy, the index tends to go up. When they are pessimistic, it tends to decline. A rise or decline in CCI can have a major effect on the way Americans spend money. This is important because consumers make up two thirds of the U.S. economic activity.
- Employment Cost Index: This index is used to monitor inflation by measuring changes in labor costs for wages and salaries and non-cash fringe benefits in non-farm private industry and state and local governments for all workers. The Bureau of Labor Statistics releases this quarterly report.
- Index of Leading Economic Indicators: The Conference Board provides this index every quarter. It consists of 11 economic reports, such as initial unemployment claims, stock-market activity, building permits, new orders for consumer goods, plant and equipment orders and sensitive material prices.
Since the LEI consists of so many varied economic reports, it is considered to be a gauge of future economic activity. Three consecutive increases in LEI suggest the economy may be starting sustained expansion.
- Industrial Production: This index, provided monthly by the U.S. Federal Reserve, offers an informed view on how key industries are faring. Specifically, it shows the change in output for three sectors: manufacturing, mining, and the gas and electric utility industries.
- Consumer Price Index: This shows whether inflation is rising or falling; the Bureau of Labor Statistics publishes it monthly. CPI tracks price changes for a fixed basket of goods and services.
Rising inflation is negative for the economy because consumers have to spend more money to buy the same goods and services. A decline in inflation tends to be positive because it means consumers can spend less for the same goods and services, leaving more disposable income to prop up the economy. However, negative inflation (or deflation) is unfavorable because people and businesses cut spending, hoping they will get goods and services at lower prices later.
- Unemployment Rate and First-Time Jobless Claims: The unemployment rate is the percentage of American workers who are out of work. First-time jobless claims reflect how many people are filing for first-time unemployment benefits. These Department of Labor reports gauge the economy.
When unemployment rises, fewer consumers spend money - a negative for the economy. When more people are working, more consumers are spending money, which promotes economic growth.
A final word: all of these economic indicators can affect the stock and bond markets, but other factors also move prices - such as short- and long-term interest rates, corporate earnings, earnings guidance from chief executives, geo-political events and general investor sentiment.
When you talk with a financial professional, you can gain additional perspectives of how these factors may impact the markets. More importantly, you can gain a better understanding of how these and other economic reports impact your investment portfolio.
This column is produced by Financial Planning Associates, and is provided by R.Hutton Cobb, a Wachovia Securities financial advisor in Greenville, N.C.