The U.S. economy is throwing off mixed signals. Are we doing okay or not? The economic indicators seem a bit confused. Unemployment remains at 3.4%, the lowest in a half-century (good). Interest rates and inflation are higher than they’ve been in decades (bad). The Gross Domestic Product grew 2.5% last year (good). And, this mixed bag of good and bad news goes on.
So, what does this mean for projecting the future of the economy? What about predicting your future?
Economic indicators are data sets that are used to interpret the current health and predict the future state of the economy.
However, economic indicators can be difficult to interpret and are best evaluated with a deep understanding of the data and knowledge of the industry or segment that is being evaluated. Even then, experts often disagree about what the data means.
Leading indicators are sometimes used by individuals and institutions to guide financial decisions or investment strategies. Businesses use them to make decisions. And notably, policy makers use them to set monetary policy like when the central bank raises interest rates.
While economic indicators are interesting, none of them function as a crystal ball especially for someone without formal economic training.
Furthermore, your plan and the actions you take (saving and investing regularly and spending less than you earn, for example) are far more important to your life than what is going on in the economy overall.
Understanding which way the economy is headed, can help you plan your future, if only in terms of setting assumptions. Assumptions in your plan are guesses you need to make about rates of return on different kinds of investments, housing appreciation, interest rates on loans, inflation, and more.
The NewRetirement Planner enables you to set both pessimistic and optimistic assumptions for: rates of return, inflation, medical cost inflation, real estate appreciation, income growth, Social Security COLA, and other aspects of your plan.
- While you want to set assumptions to a long term average, you may want to jiggle them up or down as the economy bounces along.
- You may also want to build a worst case scenario plan with particularly pessimistic assumptions and see how your finances fare.
- And, you can also view your Monte Carlo analysis and Chance of Success score, which are additional ways to assess your ability to fund your future.
Why so many different ways to assess assumptions? No matter how compelling any economic indicator might be, no one can truly predict the future. So, planning for a range of possible outcomes is a big part of insuring a secure future and that your money will last as long as you do.
You’ll never know what is going to happen and when, but considering different kinds of economic indicators may provide clues to the future.
Below we’ll cover 3 kinds of economic indicators that you may want to evaluate when setting assumptions in your plans or making decisions about money:
- Leading indicators
- Off beat or unusual indicators
- Personal economic indicators
Leading Economic Indicators
A leading economic indicator is piece of information or set of data that forecasts future change in the economy. It is data that leads– is in front of or foretells – results.
The leading indicators listed below are examples of some of the more popular macroeconomic measures that people follow. Most of the data is released by the government and non-profit organizations.
Consumer confidence measures how people feel about the economy. It tracks the emotions of regular people yet it is a surprisingly important leading indicator and a fairly reliable predictor of where the economy is headed. When people feel good about their financial situation, they spend and invest more and the economy grows. When people feel more pessimistic, then they tend to tighten purse strings and make more conservative investments and the economy slows.
At some point, the fundamental health of the economy simply does not matter. How people feel about the economy becomes a self fulfilling prophecy.
You can follow consumer confidence numbers at The Conference Board. The Conference Board Consumer Confidence Index® decreased in January 2023 following an upwardly revised increase in December 2022
Inflation is a rise in prices. High inflation usually means that that the economy is moving too fast. Low inflation can signal a recession.
There are three commonly used measures of inflation:
- The Consumer Price Index (CPI)
- The Wholesale Price Index (WPI)
- The Producer Price Index (PPI)
Gross Domestic Product (GDP) is the value of goods and services produced during a certain time period. The higher the GDP, the hotter the economy is.
You can watch GDP fluctuations here.
In general, a strong economy has just the right amount of jobs to be able to grow GDP and employ roughly the amount of people who want to work.
The Department of Labor publishes a monthly jobs report. Low unemployment is good, except that it can predict inflation. And, unemployment is very low right now.
Follow the jobs reports.
If businesses are manufacturing a lot of things, then they are probably optimistic that there are markets for what they are making, meaning the economy is growing.
Economic indicators related to manufacturing include:
- The Industrial Production and Capacity Utilization report from the Board of Governors of the Federal Reserve measures the output as compared to the capacity of manufacturing industries.
- And, a report on shipments, inventories, and orders that is designed to give an indication of demand for manufactured items.
- Durable goods orders. This measure reflects new orders placed with domestic manufacturers for delivery of long-lasting manufactured good. This report provides insight into the supply chain that drives production.
There are numerous ways to look at housing: home sales (as a total number of homes), average sales prices, the number of homes on the market, and other measures.
Each number foretells a different aspect of the health of the housing markets. You can follow home sales through the National Association of Realtors. And, home prices are tracked by the Case-Shiller Home Price Indices.
How much and what people are buying is considered an important measure of the economy. Follow retail sales here.
Evaluating new residential construction, building permits, overall construction spending, and more are ways that economists try to predict the future.
Many of the traditional economic indicators are currently out of sync with each other, making it even more difficult to predict the future. In times like these, people sometimes look for more unusual economic indicators.
Not all of the following are reliable, but they may be interesting ways to think about the economy.
The “lipstick effect” is a theory that was proposed in 1998 by economist Juliet Schor. Her data suggested that women bought more lipstick during economic downturns, perhaps trading spending on more lavish luxury products for something more affordable.
The idea gained traction in 2001 when Leonard Lauder, the chairman of Estée Lauder, reported that more customers were buying lipstick despite the post-9/11 recession. “When lipstick sales go up, people don’t want to buy dresses,” he told the Wall Street Journal.
Pandemic mask wearing may have shifted lipstick sales, so it may not be the right indicator at this particular moment in time, but you might want to look for similar shifts in spending to small luxuries.
In an interview, Warren Buffett was asked to identify the single most important economic statistic he would choose if he was stranded on a desert island for a month and could only get one set of economic numbers. Buffett reported that his favorite “desert island indicator” would be freight car loadings.
Freight car loadings measure the amount of raw materials, inputs, and supplies moving around the country every week, and this should be predictive of the future direction of the overall economy.
Some data can be found at the Association of American Railroads.
Supposedly Alan Greenspan, the former federal reserve chair, is a fan of tracking underwear sales as an unconventional economic indicator. He theorized that when purse strings are tight, people wait longer to replace worn-out items, especially those not shown to most other people. And, men, in particular might wait the longest to upgrade their under garments.
As of early February, 2023, Hanesbrand is at 10 year lows.
Maintaining dyed hair can cost $200 a month. This type of expense is tough to maintain during economic downturns. So, if you are seeing more brunette or grey hair it may be a sign that people are not making as much money as they would like.
I got a haircut this week, and the stylist where I went reports no slump.
Research suggests that when the economy is struggling, people seek companionship and dating apps get more popular. Analysis finds that people want to snuggle into a relationship when times are tough.
And, trends for visits to dating apps back up the theory. Match.com reported the largest visitor spike in over 7 years during the 2008 financial crisis. And, they reported another spike in November 2022, a 2% increase in paying subscribers across all of their brands.
Philadelphia’s last four World Series wins coincided with recessions. The Athletics’ 1929 and 1930 titles came in the early stages of the Great Depression, while the Phillies’ 1980 win came amid the energy-crisis fueled downturn and 2008 title during the worst of the Great Recession.
The Phillies came close to winning it all in 2022. Will they be a contender in 2023?
Coincidence, Not an Indicator: It may be important to point out that even though this connection has been widely covered, it is almost assuredly a coincidence. It is unlikely that anyone would actually support a reason why there is a connection between the World Series winner and the overall economic health of the United States.
If you pay attention to your own habits and make observations in your own community, you may notice patterns that indicate how comfortable you and your neighbors are with personal finances or the economy in general.
Below are a few examples. However, this section is meant to help you think about your own attitudes toward money and to be aware of how you are feeling and how your emotions impact your financial decisions.
Inflation on food prices has been pretty ridiculous this year. And, it must be bothering my husband and I because we are eating through our leftovers in a way I can’t ever remember doing before. It is a sign that inflation is having a measurable impact on our household and makes me think that others may be feeling the pinch too.
(Sure, it’s a bonus that we are wasting less food and saving a little money by doing so. But, it is an indicator that if food prices remain high, then wages may need to grow and/or more households may struggle.)
In most communities, there is one gas station that is cheaper than the rest. If your community is uneasy with the economy, you might see longer lines at that station than others.
As you saw above, people tend to go for nesting with one significant other when the economy is down. So, you may notice this trend in your own life if invitations to go out to dinner with groups of friends disappear.
Or, maybe people are shifting to less expensive get togethers. Have you noticed fewer group dinners in restaurants and more invitations to drinks, coffee, or hiking?
The jobs market is booming. Unemployment is at record lows. However, I keep hearing about white collar layoffs – both in the news and among my peers. The good news? Most people seem to be getting quickly hired into even better jobs.
What is happening with your friends? Are they expressing any financial concerns? What does what they have to say mean for economic prospects?
Perhaps the most obvious example of a personal financial indicator is your monthly budget. If you find that your monthly cash flow has shifted: you can’t save as much, you can’t fund your monthly expenses, or maybe you luckily have excess cash at the end of the month, it is a sign about what is going on in your life and it may or may not be a reflection of of the economy as a whole.
Your plans for vacation may reveal how you are feeling about your economic prospects. If you intend to stay home or choose a less expensive destination, it may reflect a pessimism about future prosperity.
Have you found yourself more wary about the stock market? Are you saving more money to cash? Have you slowed or accelerated debt payments?
There may be good rational for your strategic financial shifts, but be aware of what you are doing and think carefully about whether or not you are making good financial decisions.
Alert: Emotions like worry and financial pessimism (and optimism) can inspire financial moves that are not in your best long term interests. If you feel yourself veering away from your long term financial strategies, it may be time to meet with a financial advisor who can help you overcome emotions that may inhibit your financial growth.
Learn more about behavioral finance. Or, if you think a financial advisor could help you, reach out to NewRetirement Advisors for a free discovery session with a CERTIFIED FINANCIAL PLANNER™ professional. Or, learn more here.