What Does It All Mean?

Most investors know they should be more in touch with trends in the economy but simply find all the reports and numbers confusing and overwhelming. Which are important? What do they mean? Economists, sympathetic to the quandary faced by people who just want to be better informed, recommend looking primarily at a few indicators generally found in the daily newspapers.

First, take a look at the Gross Domestic Product (GDP). The GDP reports domestic monthly consumer spending and personal income statistics. Usually reported late in the next month following a quarter, it is a particularly useful tool in gauging how well consumers are doing financially and how confident they are about the economy. With 4% to 5% being an average consumer spending increase over the course of a year, monthly gains of 0.3% to 0.4% are consistent. Greater gains maintained over a period of time indicate that the economy is especially strong, a situation accompanied by increases in profits and employment. Conversely, when consumer spending only rises slightly for a while, the economy may be on a downturn, declining and layoffs likely.

Probably the most significant measure of consumers' outlook on the economy is the level of "durable goods" spending. This figure reflects "big ticket" purchases-appliances, furniture, and automobiles-which tend to be more readily postponed when people are pessimistic about the economy. Generally, consumer spending, particularly on durable goods, is the first indicator to react to stock market swings.

Another broad-based gauge, customarily released the first Friday of each month is the employment report for non-farm jobs. The report's non-farm payroll figure is an indicator of the profitability of the business community. Investors should consider a pick-up in non-farm payroll as an encouraging sign regarding the economy.

Finally, inflation, always a concern, is measured by the Consumer Price Index (CPI). This monthly survey of the U.S. Bureau of Labor Statistics encompasses costs of housing, food and beverages, transportation, clothing, and medical care. Monthly increases of 0.2% to 0.3% in the CPI lead to an average annual rise of 2.5% to 4%. Fluctuations in energy and food prices on a monthly basis may distort results, and many investors prefer to track the changes in the "cove" CPI without these volatile items.

Inflation is also the main determinant of interest rates, which rise and fall with the CPI. When prices increase, investors need higher returns to keep purchasing power abreast of inflation. An interesting phenomenon to remember, however, is that, though rates do decline with deflation, the adjustment downward is usually delayed somewhat compared to periods of rising rates and inflation. The lag is attributed to adjustment time for consumer perceptions and expectations.

Averages viewed over several reporting periods constitute a trend; one month's seemingly major move up or down does not. Keeping this in mind while becoming better informed about the economy can help investors approach financial planning as informed consumers and can lead to successful portfolio results.

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