Most people, when they want to understand how the economy is doing, look at their own bank accounts.
None of these things, however, are actual economic indicators in the classical sense. So what are the main economic indicators, and what use are they to long-term investors?
To cut to the chase, the short answer is “no use at all.” Long-term investors should not be trying to invest based on anything as short-term as a recent reading of GDP growth or housing data.
Nevertheless, it does help to be conversant in the main economic indicators tracked by Wall Street, at least well enough not to panic if you hear that one or another is rising or falling at an unexpected clip.
Of course, there are hundreds of indicators out there. It’s not for nothing that economics is called “the dismal science.”
Nevertheless, here are five big ones that you are likely to hear cited in the financial media from time to time, and what they really mean:
Overall, gross domestic product is the official tally of the size of the economy. Everything we make, do, buy and so on, added up. Technically, it’s the market value of all goods and services.
The total doesn’t matter. What matters is the rate of change. If GDP is growing, the economy is getting larger. If it’s shrinking, the economy is getting smaller.
What matters most here is if the number is greater or smaller than the market expects. That can have a short-term impact on your investments.
Are things getting more expensive than before, and how much so? That’s what the consumer price index intends to track.
CPI is just a technical term for inflation. Moderate inflation is what investors expect. Too much, too fast can hurt consumers but too little is a sign of tepid demand and suggests slower growth to come.
This is CPI but for industry. What are factories paying for raw materials? For investors, rising PPI signals the potential for a rising cost of finished goods, such as clothing and food, down the line.
If your neighbor loses a job, that’s a statistic. If you lose a job, that’s a calamity. Seriously, though, investors care about the jobless rate because the mission of the Federal Reserve is to manage inflation while supporting full employment.
As this figures bounces up and down it can influence the Fed to make money cheaper or more expensive, which is the interest rate. That directly affects investors since the interest rate affects lenders and borrowers across the board.
Produced by an organization know as The Conference Board, consumer confidence report numbers are considered a leading indicator, meaning they point to potential future changes in the progress of the economy and, thus, the value of stocks.
The board just goes out every month and asks a random 5,000 Americans how they feel about the economy and then release a statistical analysis of those answers. Worth knowing? Maybe.
Can you take any of these five numbers as a means of knowing which direction the stock market might go? Of course not.
You will hear pundits referring to them as “evidence” of a recent move up or down by the stock market or any given stock, but that kind of analysis is by its nature reactionary and backward-looking.
You are far better off taking into account your own ability to withstand volatility in the market and invest accordingly.
Diversification also helps to reduce the likelihood of making rash investment decisions based on any given headline you might see.
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