In addition to company and industry-level input, the state of the overall economy also provides insight for investors to make decisions. For instance, a company that makes its income largely based on consumer spending is not likely to do well in a recession. Economic indicators provide insight about the state of an economy and whether it is in expansion or contraction. Most indicators are released monthly by government agencies and typically provide input on activity in the previous month and year for comparison purposes. Here are some important US economic indicators that investors watch.
- Measuring an economy and predicting its future trajectory relies on analyzing key pieces of macroeconomic data.
- Known as economic indicators, these pieces of data quantify various aspects of an economy.
- Here, we look at several of the most important types of indicators that measure everything from economic growth to changes in prices to unemployment.
The gross domestic product, or GDP, of an economy provides the overall value of the goods and services it produces and indicates whether an economy is growing or slowing. The Department of Commerce’s look at quarterly change in GDP breaks down the activity in terms of changes in consumer spending, business investment, and government spending, as well as the net impact of foreign trade. The government puts out a preliminary first estimate, updates with a revised second reading as it gets more input, and then comes up with a third and final report.
The Department of Labor puts out a monthly release on employment, including the number of jobs created the previous month by the private sector, the government and some specific industries, as well as the national unemployment rate. Low unemployment can point to a strong economy, but can also predict rising inflation.
Industrial production is a measure of output of manufacturing-based industries, including those producing goods for consumers and businesses. This release, put out monthly by the Federal Reserve, also provides input on capacity utilization in the factory sector.
Consumer spending accounts for two-thirds of US gross domestic product and is a good gauge of consumer health. The Department of Commerce’s monthly release on personal income and outlays provides input on consumer spending. It also provides input on inflation through a price index that reflects changes in how much consumers have to spend to buy certain items.
Inflation is the general price level rise of goods and services in an economy. Too much inflation can mean the economy is "overheating" while very low inflation can be a harbinger of economic recession.
Depending upon the selected set of goods and services used, multiple types of inflation values are calculated and tracked as inflation indexes. Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). The Producer Price Index (PPI) is also used to measure inflation as it relates to producers.
Home sales represent a major purchase for most people. Thus, the Department of Commerce’s monthly report on new residential sales also speaks to consumer sentiment. This report, based on contracts to buy new or existing homes, provides input on sales of single-family homes nationally and also provides a regional breakup, as well as input on median and average sales prices. The National Association of Realtors (NAR), a private realty trade association, puts out a monthly report on sales of existing homes, based on closed sales.
The number of houses that builders started working on, as well as the number of permits that they obtained to start building houses, indicates real estate developers’ confidence level in the economy. The Census Bureau of the Department of Commerce’s monthly release on new residential construction provides this input nationally and also breaks it up by region.
Another construction-based indicator is the change in the monthly construction spending, in dollars, nationally. This spending encompasses various construction-related expenses, such as labor and materials and engineering work. The Department of Commerce provides a breakup for public and private construction, as well as for residential and nonresidential.
A report on manufacturers’ shipments, inventories, and orders gives an indication of demand for manufactured items. The Department of Commerce puts out a preliminary monthly report as well as a more lengthy report as a follow up. These reports break manufactured goods up by many different types and industries, from electronic instruments, to machine tools, to nondurable consumer goods.
The Department of Commerce’s monthly release on retail and food services sales is an indication of consumer health. This report breaks up retail sales in various sectors, such as the sales in department stores, as well as furniture and home furnishing stores.
The Bottom Line
Investors can better fine-tune their investing decisions with the help of economic indicators. While no one indicator is omniscient, using a number of indicators together can provide hints about the state of the economy.