Understanding Economic Indicators
Open the financial section of any newspaper or tune in to the cable news and you’re likely to hear about the latest economic indicators and the effect they have on the U.S. economy. An economic indicator is any statistic that "indicates" how the economy is performing today and how it may be trending for the future. Economic indicators have the power to move financial markets and directly affect interest rates. The more you know about them, the more confident you can become as an investor.
Here’s a list of some of the more prominent economic indicators, a little bit about what they are, and information about how they’re used to measure financial markets.
Consumer Confidence Index (CCI): Published monthly by the Conference Board
Based on a sampling of 5,000 U.S. households, the CCI is considered one of the most accurate indicators of consumer confidence. When there are more jobs, better wages, and lower interest rates, confidence and spending power increase. Consumer confidence is considered closely by the Federal Reserve when it sets interest rates, which in turn impact stock prices. Lower interest rates make it easier to borrow money, which often results in greater spending and higher confidence — two things the stock market loves.
Consumer Price Index (CPI): Published monthly by the Bureau of Labor Statistics
Economists consider the CPI, also known as the cost-of-living index, to be the most important indicator of inflation. It measures any change in the cost of a fixed group of products and services such as housing, food, transportation, medical care, apparel, and entertainment. The CPI is based on data collected from more than 22,000 retail and service establishments, and rent costs from 50,000 landlords and tenants. A rising CPI indicates inflation, and a large increase is usually unpopular with financial markets. The Federal Reserve typically responds to rising inflation by increasing short-term interest rates.
Gross Domestic Product (GDP): Published quarterly by the Department of Commerce
The GDP is perhaps the greatest indicator of a country’s economic health. It represents the monetary value of all the goods and services produced by an economy including consumption, government purchases, investments, and the trade balance. The GDP indicates the pace at which an economy is growing. If it fails to meet or beat the market expectations, stock prices can decline.
Employment Situation Summary: Published monthly by the Bureau of Labor Statistics
The Employment Situation Summary monitors the rate of unemployment, average weekly hours worked, and average hourly earnings. The summary is created from surveys of almost every major industry. This indicator almost always moves markets because it provides a good snapshot of the economy’s health.
Housing Starts: Published monthly by the Department of Commerce
This indicator tracks how many new single-family homes or buildings were constructed during a given month. Each house or single apartment is counted as one housing start, and most of the housing start data is collected through applications and permits for building homes. Declining housing starts show a slowing economy, while increased housing activity can lift an economy out of a downturn.
Retail Sales Index: Published monthly by the Census Bureau
The Census Bureau surveys hundreds of various-sized businesses that offer some type of retail trade. The Retail Sales Index tracks merchandise sold by companies ranging from Wal-Mart to the neighborhood grocery store and is a big market mover, especially for retail stocks.
Track Economic Indicators like the Pros
The indicators discussed above only scratch the surface of the type of economic data that is published regularly. In the past, only investment professionals and economists could receive these reports on a timely basis. But thanks to the internet, this information is now available to everyone.
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