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There are many items that influence the day-to-day moves in a stock, bond, or commodity’s price — earnings news, corporate financials, simple supply and demand, and a whole lot more. Heck, I’ve even read an academic study that argued the weather has a huge influence on whether markets close up or down!
But when it comes to figuring out the bigger-picture, longer-term moves for whole investment classes, there’s nothing better than watching a few key economic indicators.
And since this week is going to be a very busy one for data releases, I wanted to spend a little time today talking about the most important indicators you should pay attention to, along with an update on where those items currently stand right now.
Let’s start with one that will be coming out this Friday and is sure to make a big splash …
U.S. Employment Numbers from
The Bureau of Labor Statistics
While weekly unemployment claims are somewhat important to the markets, the major employment dipstick is what we get from the BLS every month.
In the “Current Employment Statistics” report we hear what 150,000 businesses and government agencies are doing with worker levels, hours, and earnings.
And in the separate monthly household survey, which is officially called “The National Employment Situation,” we get the actual unemployment rate. It’s expressed as a percentage of the overall labor force … and it’s the number most of us are familiar with hearing.
According to the August measures, the national unemployment rate rose to 9.7 percent, the highest level since June of 1983, while employers cut 216,000 jobs.
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| Unemployment should stay elevated for some time, even if the economy is already recovering. |
This Friday, both items will be released for the month of September.
While fewer jobs were probably lost, I don’t expect to see an improvement in the unemployment rate yet. In fact, most economists are still expecting a surge above 10 percent before the end of the year.
But pay close attention to these releases going forward. By knowing whether there were more or less jobs in the economy in the previous month, you can then adjust your expectations for other data accordingly.
For example, if jobs were created, we would expect more factories to be utilized.
And it follows that more people working will also be a strong gauge of our economy’s overall economic output … which is another MAJOR thing to watch …
Gross Domestic Product:
The Economic Fruits of Our Labor
This quarterly number measures our country’s economic output from all manufacturing and services. It is reported as an annual number in “real” terms, meaning that it is adjusted for inflation.
Much ado is made about the GDP releases, because they are used as the basis for the textbook definition of a recession (two subsequent quarterly contractions).
However, one of the things that many investors fail to realize is that each GDP release is eventually subjected to two subsequent revisions. That means the original number reported is not the only one to watch.
Case in point: Tomorrow we will get the final reading on second-quarter GDP. It is likely to show a 1.2 percent annualized contraction rather than the previously-reported 1 percent rate!
GDP is still what most people mean when they refer to economic growth and its effect on investor sentiment is huge.
Of course, perhaps no release has more of an immediate and far-reaching impact on all the markets than …
What the Federal Reserve Does (and Says)
At Its Open Market Committee Meetings
This group of government bankers gets together about eight times a year to talk about the current state of the economy as well as its future prospects. Meetings are on Tuesdays, and sometimes into Wednesdays.
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| Sometimes the Fed actually says what it means … |
The Fed issues a statement at the conclusion of every meeting, and the market dissects every single word of it. This is also when interest rate actions are most likely announced. Obviously, those have a huge market impact.
Much of what’s happening in each individual Federal Reserve district is contained in the Fed’s so-called “Beige Book,” which is released on a lag.
Likewise, each meeting’s minutes are disseminated to the public later. If you want to know how localized economies are holding up, the Beige Book is very helpful. And the FOMC minutes are a great way to sense what the Fed’s next move might be.
As it stands right now, the Fed is unlikely to make a major interest rate move anytime soon. In fact, at their meeting last week, they had the following to say:
“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
Of course, you cannot always take what the Fed says at face value. And as I have made known plenty of times before, I remain concerned that they will mismanage their rate actions going forward, setting up the possibility of a significant bout of inflation.
Rather than pay attention to their reassurances that “inflation will remain subdued for some time” I suggest you …
Watch the Inflation Rate Via the CPI and PPI!
The Consumer Price Index (CPI), which is released every month, is still important to the markets, because it’s a reliable benchmark for inflation, no matter how much it’s understating things.
And the PPI is also significant because it measures what businesses are paying for things. As such, it is a good front-runner to the CPI. Like the CPI, it’s based on a basket of goods, and is reported in a “headline” version as well as a “core” version. The latter excludes food and energy prices.
Both PPI and CPI are expressed as percentage increases or decreases, both against the previous month as well as against the same month a year earlier.
It’s worth noting that — after showing some outright price declines in many categories during the height of the credit crunch — these two inflation gauges have been showing renewed increases.
For example, in the latest batch of data released on September 15, PPI advanced 1.7 percent and CPI gained 0.4 percent.
A Couple of Important Points about These Four Items …
First, they’re released by the government and not necessarily perfect measures. In past Money and Markets columns, I have discussed some of the problems with these measures.
Likewise, you cannot just accept the government’s measures of other items, either. Many reports suffer from flawed assumptions.
However, with a grain of salt, these numbers can at least help you form a baseline opinion of what’s happening out there.
Second, some of these items are lagging indicators. GDP and unemployment tell us what has BEEN happening … not what is about to happen.
But when we’re trying to contextualize our long-term investment decisions, they’re still extremely useful. And when you use them to frame other short-term indicators and data items, you’ll be better able to draw reasonable conclusions.
Third, the four items I described today are just the tip of iceberg.
Heck, if you want to get a sense of how much data is out there just watch the headlines this week! We’re going to hear about consumer sentiment … other jobs numbers … a couple of manufacturing indexes … and plenty more.
Plus, in a few short weeks it will be “put up or shut up” time for Corporate America again as earnings season gets underway.
My larger point is that you’ve got to separate the wheat from the chaff and put together a series of indicators that help you quickly understand what’s happening. Once you couple that information with what you’re experiencing in your own life and hearing from friends and family, you’ll be in a better position to make solid investment decisions.
Best wishes,
Nilus
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