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March 27, 2019
Sounds useful, right? Well… maybe…
Let’s explore the pros and cons of following economic indicators.
Being aware of what is happening with the economy can be useful. Economic indicators can inform your investment strategy and help you make better financial decisions.
These indicators are compiled on a regular basis by various government and non-profit groups and give you access to tremendously detailed and powerful information and conclusions.
When you are very knowledgeable, economic indicators can help increase your wealth, but not always.
There are quite a few reasons why you don’t necessarily need to care about economic indicators, at least not on a monthly basis.
They are not a crystal ball: Economic indicators can help inform decisions, but they are not a crystal ball. They do not foretell the future.
It is just information, not a recommended action: Indicators are information. To turn that data into a recommended action requires experience and additional knowledge.
Rely on assumptions: Indicators are predictions. They rely on some facts and some assumptions. There is a lot of fortune telling involved with economic indicators.
Open to interpretation: An economic indicator reflects one set of data. However, our economy is tremendously complex with billions of moving parts. So, using a single indicator to make a decision can be ill advised.
Data can be interpreted in a variety of ways depending on your point of view and access to additional data sets.
The why is as important as the what: Data trends can be confusing. Sometimes the data intuitively indicates one thing, whilst digging deeper into the data reveals something else entirely.
Retirement investing should not be reactionary: When planning for retirement, you need a long range plan. Reacting to new data every month should probably be avoided.
Ideally you have an investment plan or even an investment policy statement that informs what you should do as the economy evolves.
Good asset allocation and diversification should enable you to ignore economic indicators: One of the goals of asset allocation and diversification should be to enable your assets to be protected and grow no matter what happens to the economy.
Once you understand the pros and cons of economic indicators, following a few can be useful. Or, at least give you a frame of reference for how the reports might impact your life and finances.
Here are 10 economic indicators that might be of particular interest to you:
The Consumer Price Index (CPI) measures changes in prices paid for goods and services by urban consumers. Does lettuce, gasoline, or a new shirt cost more or less than the previous month?
It is considered a strong indicator of inflation. Inflation can really deflate the value of your assets, and figuring out how to protect your assets from rising inflation is a huge consideration for retirement planning.
The CPI is also important for retirees because the CPI-W is the indicator that drives Social Security cost of living adjustments.
This index is released by the U.S. Department of Labor’s Bureau of Labor Statistics and is published monthly. Find it here: www.bls.gov/cpi/home.htm.
Inflation is such an important economic measure. The Producer Price Index (PPI) is another report that measures inflationary pressures.
Unlike the CPI, the PPI reports on the prices for goods at three stages of production: finished goods, intermediate goods and crude goods.
The PPI can often indicate which direction the CPI (and therefore inflation) is headed.
It is also produced by the U.S. Department of Labor’s Bureau of Labor Statistics and is published monthly. Find it here: www.bls.gov/ppi/home.htm
Many experts consider the Gross Domestic Product (GDP) to be the most important economic indicator. The real GDP is the market value of all goods and services produced in a nation during a specific period of time. It is the sum of what our economy is producing.
Investors are particularly concerned with the GDP because it indicates how fast profits may grow and the expected return on capital.
The GDP is measured by the U.S. Department of Commerce’s Bureau of Economic Analysis. You can find it here: www.bea.gov
The Consumer Confidence Survey measures how a random sampling of 5,000 individuals feel about today’s business conditions, jobs, consumer spending, economic growth and their financial expectations for the next six months.
Experts conclude that if consumers are feeling positive, then they will likely be spending more money — a positive indication for the health of the economy.
The Consumer Confidence Survey is produced by the Conference Board’s Consumer Research Center on the last Tuesday of each month. You can find it here: www.conference-board.org/data/consumerconfidence.cfm
There are a few different indexes measuring the housing market. The most well known are perhaps the Standard & Poor’s CoreLogic Case-Shiller home price indices: the national home price index, a 20-city composite index, a 10-city composite index, and twenty individual metro area indices.
These indices measure the change in repeat sales of single-family homes (as opposed to new homes).
Since consumer wealth is largely tied to homes, this can be an important national index. However, home prices in your own community are probably more important to you and can vary greatly from national prices.
You can find it here: us.spindices.com/regional-exposure/americas/us
Interest rates represent the cost of borrowing money and are based around the federal funds rate.
They can be important in retirement if you have debt or are trying to borrow. (Borrowers want low interest rates.) They can also be important if some of your assets are held in cash accounts that earn interest. (If you have savings in a cash account, you want high interest rates.)
However, interest rates also forecast the health of the economy. High interest rates generally discourage growth while low interest rates can signal inflation.
There are a variety of ways economists measure the health of employment. They look at how many people are seeking jobs. How many people are seeking jobs who want to find jobs. How many people are employed. And, how many are unemployed. And, there are others.
Hearing one of these indicators out of context and without a lot of background information can be misleading.
However, these measures can indicate the health of the economy.
The ballpark indicator is kind of a fun. U.S. News and World Report quoted Terrance McGuire, a portfolio manager at Dividend Growth Partners, about the ballpark indicator. He says: “One of my favorite indicators I personally use is what I call the ballpark indicator. When you go to a professional stadium, for example, take a look at where the advertising is coming from. If it’s spread out among a lot of different industries, that can often be a sign of a diverse and healthy economy.”
This is just an example of economic indicators that you can find wherever you go. What is the cost of gas or eggs? Did your neighbors all recently get a new car? Are your schools financially healthy?
Economic indicators are everywhere.
There are a few different stock market indices that you might consider knowing about. The three most popular are probably:
S&P 500: This index reflects the health of 500 stocks chosen based on market size, liquidity and industry group representation. According to AAII, this index is important because: “It is used as a measure of the nation’s stock of capital, as well as a gauge of future business and consumer confidence levels. Growth of the S&P 500 index can translate into growth of business investment. It can also be a clue to higher future consumer spending. A declining S&P 500 index can signal a tightening of belts for both businesses and consumers.”
The Dow: The Dow is an index of 30 large publicly traded companies on the New York Stock Exchange and the Nasdaq. They are almost all companies you know, like: American Express, Apple, Nike, Exxon Mobil, etc…
Nasdaq: While the Nasdaq is a stock exchange, it is also a stock index. The Nasdaq composite contains all of the companies that trade on the Nasdaq. Most companies on the Nasdaq are technology and internet-related.
How you are feeling about the economy generally and your own finances specifically are probably the most important economic indicators.
A detailed retirement plan is also a good index for the health of your finances.
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