Economic Indicators to Know Before Investing

 Economic Indicators to Know Before Investing

Economic indicators are among the most significant tools that investors might have at their disposal. Metrics like the Consumer Price Index (CPI) and written reports like the Beige Book, which are consistent in their release and broad in breadth and range, are free for all investors to review and assess.1-2 Indicators are used by policymakers, most notably those at the Federal Reserve, to identify not just where the economy is heading, but also how quickly it is getting there.3

San Francisco Federal Reserve Bank. "What Is the Single Most Important Economic Indicator for Policymakers?"

Although investors should familiarize themselves with economic statistics, the reports are often dry and the data is raw. In other words, information must be contextualized before it can be used to make financial and asset allocation decisions. However, there is useful information in those raw data dumps. The different government and nonprofit agencies that conduct the polls and publish the reports do an excellent job of compiling and presenting what would be logistically difficult for any single investor to undertake alone. Most indicators cover the entire country, and many provide comprehensive industry breakdowns, both of which can be quite beneficial to individual investors. 

What Exactly Is an Economic Indicator? 

In its most basic form, an indicator is any piece of information that can assist an investor in deciphering what is going on in the economy. The US economy is essentially a living creature, with billions of moving elements at any given time, some acting and others reacting. Because of this simple fact, making forecasts is incredibly tough. They must always involve a significant number of assumptions, regardless of the resources available. Investors, on the other hand, can obtain a better grasp of diverse economic conditions by using a wide range of economic indicators. There are other indexes for coincident and trailing indicators, with the components of each based on whether they rise during or after an economic expansion.

Use in Context, Use in Tandem

Once an investor understands how various indicators are computed, as well as their relative strengths and weaknesses, many reports can be used in tandem to make more informed decisions. Consider using data from many releases, for example, in the field of employment. Investors can receive a pretty complete picture of the labor market by combining hours-worked data (from the Employment Cost Index) with the labor report and nonfarm payrolls.4

Furthermore, are rising retail sales data being confirmed by rising personal spending? Are new factory orders increasing factory shipments and durable goods figures? Do increasing wages translate into higher personal income figures? Before acting on the outcomes of any single indicator release, the astute investor will search up and down the supply chain for confirmation of trends.

Customizing Your Research

Some people may prefer to focus on a few key indicators and utilize their professional knowledge to make investing decisions based on their research. Others may prefer to take a jack-of-all-trades strategy, learning the fundamentals of all the indicators without depending too much on them. An elderly couple living on a combination of pensions and long-term Treasury bonds, for example, should be looking for different things than a stock trader riding the business cycle. Most investors lie somewhere in the middle, hoping for stock market returns that are consistent and close to long-term historical averages (8% to 10% per year).

Knowing the expectations for any given release, as well as the macroeconomic forecasts in general, is beneficial. Forecast figures can be accessible on a variety of public websites, including Yahoo! Finance and MarketWatch. There will be press releases from newswires such as the Associated Press and Reuters on the day a certain indicator is released, presenting numbers with critical elements highlighted.

It is beneficial to read a report on one of the newswires, which may parse the indicator data using filters such as analyst expectations, seasonality figures, and year-over-year outcomes. Those who utilize investment advisors will most likely study newly released signs in an upcoming newsletter or discuss them at upcoming meetings.

Keeping an Eye on Inflation Indicators

Many investors, particularly those who focus on fixed-income instruments, are concerned about inflation. Current inflation, its strength, and what it might be in the future are all important factors in deciding interest rates and investment strategies. Inflationary pressure is the focus of several indicators. The Producer Price Index (PPI) and the Consumer Price Index (CPI) are the most notable in this category.5 

Many investors will look to the PPI to forecast the forthcoming CPI.

There is a statistical relationship between the two, as economic theory implies that if goods manufacturers are compelled to pay more for production, part of the price rise will be passed on to consumers. Each indicator is calculated individually, however, they are both published by the Bureau of Labor Statistics (BLS). Other important inflationary indicators include money supply levels and growth rates, as well as the Employment Cost Index (ECI).6-7

Stock Investors Inquire About Economic Output

The GDP may be the most important metric available, particularly for equity investors interested in corporate profit growth. Because GDP represents the sum of our economy's output, its growth rate is targeted to remain within specific ranges. If the figures begin to slip outside of those areas, the markets will become more concerned about inflation or a recession. To avoid this anxiety, many individuals will pay attention to monthly data that can provide insight into the quarterly GDP report.

Capital goods shipments from the Factory Orders Report, for example, are used to determine producers' durable equipment orders in the GDP report.8

 Retail sales and current account balances are also employed in GDP estimates, therefore their release serves to fill a piece of the economic puzzle before the quarterly GDP release.9

Other variables that are not included in the GDP estimates are nonetheless useful for forecasting. Wholesale inventories, the Beige Book, the Purchasing Managers' Index (PMI), and the labor report all provide insight into how well our economy is performing. With the help of all of these monthly statistics, GDP estimates will begin to tighten as component data is revealed gradually throughout the quarter. By the time the official GDP report is issued, there will be a remarkably accurate consensus on the figure. If the actual results differ significantly from the estimates, the markets will react, typically violently. If the figure lands exactly in the middle of the projected range, markets and investors can collectively pat 

themselves on the back and continue with current investing trends. 

Make a note of it in your calendar.

Indicators can sometimes be more valuable since they contain up-to-date information. The Institute for Supply Management, for example, releases its PMI report on the first business day of each month.10

As such, it is one of the first pieces of aggregate data for the recently concluded month. While not as detailed as many of the indicators to come, the category breakdowns are frequently dissected for hints to things like upcoming labor report specifics (from the employment survey results) or wholesale inventories (from the inventory survey). 

Because the relative order of the indicators does not change from month to month, investors may choose to mark a few days on their monthly calendars to read up on the parts of the economy that may influence how they think about their investments or time horizon.11

Overall, asset allocation decisions might alter over time, and making such modifications after reviewing macro data periodically may be prudent. 

Bottom Line 

Benchmark economic indicator data arrives without an agenda or a sales pitch. The data just is, which is difficult to come by these days. Investors can better comprehend the stock market and the economy in which their dollars are invested by learning the whats and whys of the major economic indicators. They can also be better prepared to review an investment thesis when the timing is appropriate. While there is no single "magic indicator" that can predict whether to purchase or sell, employing economic indicator data in conjunction with normal asset and securities analysis can result in smarter portfolio management for both professional asset managers and do-it-yourself investors.