Economic Indicators - What do they Indicate?

It can be a tough job these days, trying to keep up with all the information at your finger tips. Making sense of it all can be overwhelming, even for a professional.

As a new financial advisor my diet consisted of The Wall Street Journal, Barons, and a healthy 12 hour dosage of CNBC, every Monday through Friday. I was also an avid reader of the Economist magazine. I would put that at the bottom of the must read list though because it covers such a broad look at global economy.

While that is great to get that perspective, it takes some time to find articles that are relevant to one’s own situation. Again, the magazine covers economies worldwide, so if you want to find out the GDP of India, that’s the place to go. If you were to sit and watch CNBC every day for a month you would be amazed at the amount of relevant information you can retain. You would walk away having a much better grasp on the things that you need to know for your own personal situation. Having your finger on the pulse of the market through CNBC is never a bad thing, and as they say, “knowledge is power.”

For the purposes of this article, we are going to set aside CNBC, Wall Street Journal and all of those other fascinating news sources and concentrate on the economy, and specifically focus on economic indicators.

The condition and the direction of the US economy is what drives bond prices and interest rates. Even though no one can accurately predict interest rates, or the direction of the economy, bond gurus use the data so they can make better decisions regarding their bond positions. Bond traders are able to profit on interest rate movement, whether it is an upward movement or a downward trend.

While bond traders need to follow economic news, specifically the different indicators, buy and hold investors do not have to be quite so vigilant. If your thirty year 6% bond was purchased solely for income purposes, you will probably not be too concerned by price/yield movement on a daily or weekly basis. Your main concern will be call features if any, and issues with bond defaults.

Price and yield movement can really happen fast anytime there are economic numbers reported that contained data that was unexpected. To make it simple, think about when the FOMC meets to talk about interest rates. If it is widely expected that the FED will leave short term rates unchanged, and we get a curve ball in the form of an interest rate hike; watch out. Things will move just as fast to unexpected good news. The key term here is the word unexpected.

Let’s take the following example. You hold 1000 shares of Microsoft, and they are about to announce their earnings. Wall Street expects them to earn 23 cents a share. Microsoft reports a profit of 21 cents a share and a downward revision of estimates going forward the next two quarters. Had we been expecting it, it would not have been such a market moving announcement. Microsoft stock will plummet.

Other software companies are likely to drop while they seek to determine if Microsoft’s woes are specific to the company, or is it an economic issue that will affect all similar companies. Of course on the upside, if they report better than expected earnings the stock is likely to bounce. I want to stress here, the key word is unexpected.

People, not just investors, want to know about the health of the economy. If you have an idea what is going on with the economy, you will have a better sense of the direction you need to take with your investments.

Before we get into any detail about economic indicators, let’s find out what the three types of indicators are. They are as follows; leading indicators, coincident indicators, and lagging indicators.

Leading economic indicators are those which change before the economy itself changes. The stock market is a good idea or a leading economic indicator.

This is an index published by the Conference Board and is broad measurement of current economic conditions which helps investors determine which phase of the business cycle the economy is in.

This index is used to confirm the direction of the US economy from data over the last few months or so. The index is made up of seven economic components whose changes come after the overall economy changes.