What Do Those Economic Indicators Really Mean?

FINANCIAL FOCUS

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If you follow the news regularly, you will see many different reports on the state of the economy. Government officials and economists closely watch these reports, and, as a Rim Country investor, maybe you should, too.

Here are a few of the most important economic indicators to consider:

  • Employment Situation Report: This monthly report, issued by the Bureau of Labor Statistics, shows the unemployment rate, new jobs created, the average weekly hours worked and the average hourly earnings. Economists and policymakers watch this report closely because employment drives consumer spending -- a key factor in economic growth. Furthermore, low employment figures can cause the Federal Reserve to lower interest rates, while high employment figures can signal an overheated economy, which may lead the Federal Reserve to raise rates. Higher interest rates can have an effect on all your investments. When rates rise, it's more difficult for companies to borrow to expand their businesses, which can hurt their stock prices. Also, higher interest rates will likely cause the value of your bonds to drop.
  • Housing Starts: Around the middle of every month, the Commerce Department releases a report on housing starts for the previous month. Economists consider housing starts to be a leading indicator of recessions and recoveries, and both those events can have an impact on interest rates.
  • Advance Monthly Retail Sales: Each month, the Census Bureau reports on retail sales for the previous month. This indicator tracks the merchandise sold by companies, large and small, within the retail industry. Each month's report shows the percent change from the previous month. This indicator can affect some important areas of the financial markets, particularly retail stocks.
  • Consumer Price Index (CPI): Released midmonth by the Bureau of Labor Statistics, the CPI is considered the most widely used measure of inflation. Basically, the CPI tracks the monthly change in price of a "basket" of consumer goods and services. Generally speaking, the financial markets anticipate the CPI will rise at an annual rate of 1 percent to 2 percent; any larger increase is seen as a signal of inflation heating up too much. (Keep in mind that the "core rate" of inflation excludes food and energy prices, which are often volatile.)
  • Producer Price Index (PPI): Generated each month by the Bureau of Labor Statistics, the PPI is not as commonly used as the CPI, but it is also considered a reasonably good indicator of inflation.

The PPI is essentially a basket of various indexes covering a wide range of industries, including manufacturing and agriculture. Because the PPI includes goods being produced, it is often seen as a "forecast" of future CPI reports.

When it comes to investing, no one has a "crystal ball." But by paying close attention to these and other economic indicators, your investment professional can acquire valuable information that may well help you make the right moves at the right time.

-- Scott Flake is a licensed investment representative with the firm of Edward Jones. For more information, call him at (928) 468-1470.

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