Part I
Figuring Out the Economy
In this part . . .
If you’re looking for a quick refresher on economics and wondering why you should want to follow economic indicators, you’ve come to the right place. Here you can explore concepts like economic growth and recession, the business cycle, and the relationship between investment markets and the economy. You also find explanations for the analytic concepts you need to know and definitions for some of the jargon used in economic indicators. In addition, this part introduces you to several different kinds of indicators and explains how they’re used.
Chapter 1
Introducing Economic Indicators
In This Chapter
Defining economic indicators
Looking at what the indicators tell you about the economy
Figuring out how to track and use indicators to meet your needs
Everyone has a financial interest in the economy. Although you may not think about it every day, your country’s economic system has a direct impact on your financial well-being. After all, the economy is made up of you, me, and all the people who buy products and services; the companies that create those products and services and deliver them to their consumers; the factories and equipment used to make the products; the facilities needed to offer the services; and of course, the government.
So you see, everyone has an economic role to play. Whether you’re a business leader, an employee, an investor, or a consumer, your actions affect the economy and the economy affects you and your finances.
If you’re thinking, “Wow, I should really start paying attention to the economy,” you’ve come to the right place! Economic indicators can help you measure the performance and health of the economy and forecast its future. As a bonus, economic indicators can even help you improve your investment returns, your business plans, and your financial health. This chapter serves as a jumping board into the pool of economic indicators. Here I give you a basic overview of the topic so you can navigate your way through the rest of this book.
Understanding What Economic Indicators Are
Can you picture NASA’s Mission Control Center? Today it’s all flat-panel displays and subdued lighting, but it used to be a system of big industrial panels with blinking lights, gauges, levers, dials, push buttons, and at least one bright-red phone. Each one of those lights and gauges displayed some tiny piece of information that was crucial to whatever mission NASA was working on at the time.
The economy is a bit like NASA’s Mission Control Center. Each economic indicator is a metaphorical dial, light, or gauge that provides information about some part of the economy. One dial shows how many people are working, and another shows how many are unemployed. One gauge shows how many cars were manufactured last month, and another tells how high interest rates have grown. These metaphorical dials and gauges show you what’s happening in the economy right now.
Although no single Mission Control Center exists for the economy, you can use a collection of economic indicators to see what’s happening economically. And although you can’t push a button and make the economy change course (at least not by yourself), you and your fellow citizens do have some say about the economy through the purchasing, employment, and other business decisions you make on a daily basis.
When you decide to buy a car or not buy a car, start a business, hire new workers, or even take a new job, you have an effect on the economy. When a lot of people make the same decision and push the same economic buttons, noticeable changes happen in the economy.
Economic indicators show you what’s happening in the economy. Most indicators examine and report only a tiny slice of the economy, but several of them provide information about the whole economy in one report. By using a combination of both types of indicators, you can tell where the economy has been and where it’s headed.
The following sections provide a bit more insight into how to read economic indicators and what they can tell you about the economy.
Reading the economy through economic indicators
The economy isn’t complicated, but the experts who spend their days studying it have devised their own private jargon to describe it. Unfortunately, their terminology often obscures the economy’s simplicity. But the economy doesn’t have to be confusing. You can use economic indicators to help you read what’s happening in the economy.
Several types of economic indicators exist. Some record one kind of data, like the number of people filing for unemployment insurance, and then tabulate and publish the results. Others survey consumers to see how they’re feeling about their financial health. Still others massage the data they collect, using complex mathematical formulas, to try and create easy-to-interpret numerical indexes that represent (or indicate) the level of things like inflation and consumer confidence.
These different indicators are often categorized by their ability to forecast. Leading indicators turn up or down before the economy, so they’re generally considered to be good forecasting tools. Coincident indicators are useful for identifying the economy’s current health, and lagging indicators tell where the economy has been.
Find out more about economic jargon as it relates to indicators in Chapter 2. There you also find a brief refresher on the math you need to understand to correctly interpret some economic indicators. It’s not high-level math, so don’t worry if math isn’t your strongest subject.
Cycling through economic ups and downs
You can use economic indicators to give you a clear picture of what direction the economy has gone and where it’s going. Economic indicators demonstrate when the economy expands, like during economic growth, and when it falls, like in a recession.
Economic indicators help identify the following pattern of economic expansion and contraction as it happens over and over again:
At the beginning of an economic recovery, you see an abundance of underutilized production equipment and even some factories that have been idle. A lot of people are looking for work, interest rates are generally low, and the supply of raw materials needed to make new products is high.
As the economy expands, most people who want a job can find one, factory equipment is put to good use, and idled factories are restarted.
At some point during the expansion, some raw materials become hard to find. For example, say the lumber used for new-home construction becomes scarce. The price of the lumber goes up as a result, and so do the prices for new homes. As the expansion matures, companies may have a hard time finding the skilled workers they need to continue growing the business. Raw material and labor scarcity leads to rising commodity prices and higher wages.
Economic growth slows down. The Federal Reserve observes the rising prices and the potential for inflation. It responds by raising interest rates...
