How can you tell if the economic turnaround is real? It's a legitimate question, yet no one seems to have the answer. However, there are a host of economic indicators used to watch the economy and gauge its health, including: (Find out which catalysts can turn struggling stocks around to create a tidy profit, in Turnaround Stocks: U-Turn To High Returns.)
- Gross Domestic Product
Gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. When GDP is growing, the economy is in better health than when it is not. When GDP falls for two consecutive quarters, the economy is officially in a recession.
When manufacturing numbers are up, the economy is in better shape than when manufacturing is in decline. The Institute for Supply Management publishes the Manufacturing ISM Report on Business, which is used to track manufacturing activity at the national level.
Inflation is often tracked by changes in the consumer price index, which reflects the weighted average of prices of a basket of consumer goods and services, such as transportation, food or medical care. Mild inflation is typically viewed as a positive economic indicator. Rampant inflation, which reflects significant price increases, is viewed as a negative. Deflation, which reflects prices declines, is similarly viewed as a bad sign.
Large-scale business growth and consumer spending can't occur without easy access to credit. Even people who have jobs generally require loans in order to make big-ticket purchases, such as homes and automobiles.
Unemployment is currently sitting at double-digit levels, and the economy continues to shed jobs. Until job creation replaces job destruction, the economic turnaround will be incomplete.
- Consumer Spending
When times are good, consumers spend. When times are bad, consumers cut back on their spending.
Housing prices and sales are an excellent indicator of supply and demand. When prices are climbing, people are buying homes. When prices are falling, it's in direct response to lack of demand. People who are unemployed, fear the prospect of unemployment, or are otherwise nervous about the economy don't buy homes.
- Your Personal Financial Situation
There's a tongue-in-cheek saying that has more than just a little bit of truth behind it. One version of it goes something like this: When your neighbor is unemployed, it's a economic downturn. When your brother-in-law is unemployed, it's a recession. When you are unemployed, it's a depression.
While this unscientific and slightly glib saying won't be found in many economic text books, it is a reminder that everything is relative. Even during the worst economic downturns the United States has ever seen, the vast majority of its citizens remained employed and able to pay their bills. Although tough times are never fun, be sure to count your good fortune - even if you are doing well when the economy isn't. (When the dust from a recession settles, there are often many opportunities for portfolio growth - both locally and internationally. Find out more in Profiting In A Post-Recession Economy.)