|Seven key economic indicators for wise investment decisions|
Wednesday, 06 November 2013 00:00Written by Chelsea Bowling
There are dozens of economic indicators released every week, and due to the internet’s increasing digitization of these reports the information can now be accessed by everyone.
Economic indicators are used by investors and other financial professionals to gauge the direction of the market to make informed choices about where to place, or keep, their money—but the sheer number of indicators can be confusing to the non-professional.
Here are the seven most important indicators to keep an eye on when making investment decisions.
1: Gross Domestic Product (GDP)
GDP is one of the most important of all economic indicators, and by far the most closely monitored. As a measure of a country’s total economic production, GDP tells more about the overall health of the economy than any other indicator, and when it is released quarterly it always has the power to move markets. Investors generally concur that it is best for the long-term rate for GDP to be in the 3% range for the U.S., which is high enough to indicate growth but low enough to ease worries about rampant inflation.
2: Consumer Price Index (CPI)
The Consumer Price Index looks at the price increase or decrease of a set basket of goods over the years, and is considered to be the standard for judging inflation. For that reason it’s as important as GDP when considering investment decisions, because of its value in predicating other market reactions and because it influences future Federal Reserve decisions about interest rates. Cost-of-living increases, pensions, Medicare, and other cash flow mechanisms are also influenced by the CPI.
3: Employee Situation Report
Also known as the Labor Report, this report is the benchmark for judging the overall health of the labor market because it details non-farm payrolls, hourly wages, and hours worked. This report is closely watched by the Fed and financial analysts, and can by itself influence the market. If wages are dropping compared to inflation, for example, that bodes ill for retail industries in the future.
4: Durable Goods Report
The Durable Goods Report shows the industry demand for various classes of goods, and though this measurement is somewhat volatile it provides investors with a good indication of overall business demand within a given industry.
5: Personal Income and Outlays
This monthly report details both personal income—wages/salary, dividends, interest, and so on—as well as consumption, which includes payments on goods and services as well as interest paid on loans. For investors, the key things to draw from this report are rates of personal savings, and disposable income figures. The latter in particular is very useful for gauging consumer demand in the future.
6: Producer Price Index (PPI)
The PPI reports on wholesale, or producer, prices; for this reason it is extremely useful to determine trends within certain manufacturing industries, as well as wholesale and commodities markets in general. It tends to be a good predictor of future CPI as well, whose value as an indicator has already been detailed.
7: Retail Sales Report
The Retail Sales report is a closely watched indicator, because its tracking of retail sales is often used to make predictions about inflationary pressure. This in turn influences Federal Reserve decisions about interest rate cuts or hikes, which naturally can have very large consequences for investors and the general public. For these reasons, this report when released can often sway the stock market in both positive and negative directions.