Financial Focus: What Do Those Economic Indicators Mean, Anyway?
What Do Those Economic Indicators Mean, Anyway?
If you follow the news regularly, you will see many different reports on the state of the economy. Government officials and economists closely watch these reports--and, as an investor, maybe you should, too.
Here are a few of the most important economic indicators to consider:
* Employment Situation Report- This monthly report, issued by the Bureau of Labor Statistics, shows the unemployment rate, jobs created, the average weekly hours worked and the average hourly earnings. Economists and policymakers watch this report closely because employment drives consumer spending--a key factor in economic growth. Furthermore, low employment figures can cause the Federal Reserve to lower interest rates, while high employment figures can signal an overheated economy, which may lead the Fed to raise rates. Higher interest rates can have a strong effect on all your investments. When rates rise, it's more difficult for companies to borrow to expand their businesses, which can hurt their stock prices. Also, higher interest rates will likely cause the value of your bonds to drop.
* Housing Starts- Around the middle of every month, the Commerce Department releases a report on housing starts for the previous month. Economists consider housing starts to be a leading indicator of recessions and recoveries--and both those events can have big impacts on interest rates.
* Advance Monthly Retail Sales- Each month, the Census Bureau reports on retail sales for the previous month. This indicator tracks the merchandise sold by companies, large and small, within the retail industry. Each month's report shows the percent change from the previous month. This indicator can affect some important areas of the financial markets, particularly retail stocks.
* Consumer Price Index (CPI)- Released mid-month by the Bureau of Labor Statistics, the CPI is considered the most widely used measure of inflation. Basically, the CPI tracks the monthly change in price of a "basket" of consumer goods and services. Obviously, a rapidly rising CPI is cause for concern, because, as mentioned above, a high rate of inflation could lead the Federal Reserve to raise interest rates. Generally speaking, the financial markets anticipate the CPI will rise at an annual rate of 1% to 2%; any larger increase is seen as a "danger signal" of inflation heating up too much. (Keep in mind that the "core rate" of inflation excludes food and energy prices, which are often volatile.)
* Producer Price Index (PPI)- Generated each month by the Bureau of Labor Statistics, the PPI is not as commonly used as the CPI, but it is also considered a reasonably good indicator of inflation. The PPI is essentially a basket of various indexes covering a wide range of industries, including manufacturing and agriculture. Because the PPI includes goods being produced, it is often seen as a "forecast" of future CPI reports.
When it comes to investing, no one has a "crystal ball." But by paying close attention to these and other economic indicators, your investment professional can acquire valuable information that may well help you make the right moves at the right time.
This article was submitted by local financial representatives of Edward Jones.