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:
- 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.
- 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 economic activity 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.
- 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.
- 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.
- 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 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, a Realtor trade association, puts out a monthly report on sales of existing homes, based on closed sales.
- 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 second reading as it gets more input, and then comes up with a third and final report.
- The Institute for Supply Management puts out a monthly report on activity in the manufacturing sector nationally. This report provides an overall gauge of the manufacturing sector through an index. It also looks at aspects such as new orders, employment, and production in the sector.
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.