Every week, we see dozens of economic reports and indicators providing us with a fresh look at the economy. They may tell us how many new jobs were added to the workforce, new homes built, where inflation stands or how retail sales fared. While most have the potential to move the market and investment accounts, few understand their meaning.
Most of us are familiar with Federal Reserve Chair Ben Bernanke, and his comments on the economy and interest rates moves. However, several other economic indicators go unwatched that play an important part in the overall health of the economy. It all can seem a bit overwhelming, so let’s begin by differentiating the different classes of indicators.
Economic indicators are classified into three categories – leading, lagging or coincident. Leading indicators change before the economy changes, and are one of the most important to investors in gauging how the economy will perform in the future. Meanwhile, lagging indicators do not change direction for a few quarters after the economy starts to decline or improve, and coincident indicators move in tandem with the economy.
Here is a look at some of the important economic reports, and how they move the economy and the markets.
Gross Domestic Product – Measured annually – but updated quarterly – GDP represents the value of goods and services produced in the U.S. Probably the broadest indicator of economic output, GDP measures the pace at which the economy is growing or shrinking. If GDP growth does not meet or beat market expectations, stocks could temporarily decline in price.
Consumer Confidence Index – Considered one of the most accurate indicators of confidence. The index is based on a sample of 5,000 households, and even calculates the number of “help wanted” ads in newspapers to determine the state of the job market. The idea is that as we experience an increase in jobs and wages, and lower interest rates, it increases our confidence and spending power.
Consumer Price Index – Widely used to measure inflation and the effectiveness of government policy. The CPI, which is considered to have great influence on the market, is a basket of consumer goods including everything from the price of milk and gasoline to funeral expenses. A rising CPI indicates inflation, which is something the markets don’t like to see.
Producer Price Index – Not as widely used as the CPI, but considered a good measure of inflation. The PPI is a monthly report that looks at the costs producers pay for goods produced, such as manufacturing and agriculture. A PPI reading can sometimes predict what is to come with the CPI.
Housing Starts – Tracks how many new single-family homes or apartments were constructed throughout the month. Most of the data is collected through applications and permits for building homes. Although it doesn’t have a huge impact on the market, the U.S. Census Bureau has reported that the housing industry represents more than 25 percent of investment dollars.
Purchasing Managers Index – A composite index based on new orders, inventories, production, supplier deliveries and employment that is used to measure factory production. An important read for investors, the PMI provides a quick snapshot of the manufacturing sector with any unexpected change having the potential to impact stocks. When the index tops 50, it indicates expansion in manufacturing; anything below 50 means the industry is contracting.
Retail Sales – Tracks merchandise sold within the retail sector, which may include your local grocer, electronics store or clothing chain. Retail sales are important in determining the health of the economy. These results can also have an impact on the market, especially retail stocks.
Economic indicators provide a broad look at the economy. While some reports may have an indirect impact on consumers and investors, others may have the potential to shift the direction of both the economy and the markets. There is an abundance of information available, and knowing what these indicators mean can help one better understand the health of the economy, as well as investor reaction to economic news.
This article is provided by Pamela J. Carty, AWM, a Financial Advisor at RBC Wealth Management in Bend, Oregon, and was prepared by or in cooperation with RBC Wealth Management. The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance. RBC Wealth Management does not provide tax or legal advice.
RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC, GI006.
