What Is a Barometer?

Barometers are data points that represent trends or sentiment in the market or the general economy. The Standard & Poor's 500 Index and the Dow Jones Industrial Average (DJIA) serve as barometers of stock market performance, and are often used as barometers for the U.S. economy as a whole. It is quite common for a stock index or exchange to be used as a barometer for national economic health. Barometers can also be used to measure behavior at the consumer level.

For example, slowing sales at high-end restaurants while revenues at fast-food eateries increase may be an indication that consumers are reigning in their spending.

Key Takeaways

  • A barometer is a measure of changing sentiment or an imminent trend reversal using a series of data points.
  • Economic barometers gauge consumer and producer sentiment based on factors such as GDP growth and unemployment figures.
  • Market barometers sense trends and reversals, often using broad market indices as indicators.

Understanding Barometers

In meteorology, barometers predict a coming storm by measuring changes in atmospheric pressure. By analogy, taking a barometric reading of the market or of the economy can give an impression of sentiment or changing trends. Sentiment indicators can be used by investors to see how optimistic or pessimistic people are about current market or economic conditions.

For example, a consumer sentiment indicator, such as the Michigan Consumer Sentiment report, shows pessimism may make companies less likely to stock up on inventory, because they may fear that consumers will not spend.

Barometers are often sequential data points that measure the direction and strength of trends ranging from global economies to consumers in specific regions. These measurements can be used as single trend indicators or aggregated and assessed for correlating data points.

Generally speaking, high data correlation indicates trends that have traction and may be building strength, while measurements showing mixed signals may be indicative of directionless markets. Examples of economic barometers include the unemployment rate, job creations and inflation rates.

Economic Barometers

Many of the barometers that measure economic trends are issued by government agencies and departments. For example, the monthly unemployment rate and inflation data are announced by the U.S. Department of Labor, while the quarterly gross domestic product (GDP) report is issued by the U.S. Department of Commerce. These barometers provide a general accounting of the health of the economy at the macro level using massive amounts of data collected across the country.

Market Barometers

Headline barometers such as the S&P 500 Index measure the broad market by tracking the price performance of a diverse portfolio of companies representative of the U.S. economy. Sector-level barometers can provide intelligence on developing trends in specific industries, which can be indicative of trends for both the economy and consumer behavior.

For example, increasing sales by companies in the consumer cyclical sector, which includes electronics, apparel and travel companies, may be indicative of a healthy economy in which discretionary income is increasing.

January Barometer

The January Barometer is a theory positing that the movement of the Standard & Poor's 500 Index (S&P 500) during January sets the stock market's direction for the year (as measured by the S&P 500). The January Barometer states that if the S&P 500 were higher on January 31 compared to the beginning of the month, proponents would expect the stock market to generate positive results during the remainder of the year.

Consumer-level Barometers

Barometers that measure consumer behavior include housing sales, consumer spending and durable goods sales. These barometers are followed closely because consumer spending represents approximately 70% of the nation’s GDP, and the earliest signals of shifts in the economic landscape are often indicated first by changes in consumer behavior.

Tracking these behavioral changes, especially when barometers are tightly correlated, can help businesses stay ahead of the curve by taking proactive measures and making informed decisions on short- and intermediate-term strategies, management of inventories and expansion.