The state of the economy can make a big difference in our lives. It affects opportunities in the job market, drives stock market, determine prices and influences buyer behavior.
When economy is robust, there’s optimism in the air. Companies’ hire, investors invest and consumers spend. When economy is sluggish, mood is somber, companies struggle to make a profit, investors are more cautious and consumers tighten their wallets.
How do we know if the economy is doing well?
Economic indicators that go hand-in-hand with economic health, provide clues. Direct economic indicators go up when economy is rosy and down when economy tanks. Other factors have an inverse relationship with the economy. These inverse factors fall and rise opposite the strength of the economy.
Leading economic indicators are considered most important factors to watch. Unlike lagging economic indicators that appear after economic change, these indicators come first, helping economists predict the direction of the economy. Here are some of the most discussed leading economic indicators.
Consumer Price Index (CPI) — Is a consolidated measure of price of goods and services over time at the consumer level. Observed changes in CPI help determine inflation and cost of living, help shape our monetary policy. Measured by the Bureau of Labor Statistics, the CPI is calculated for food, energy and other consumer goods. Further analysis within these categories reveal what influences price fluctuations.
Prices of some goods and services are more influential than others. For example, we are a nation of automobile owners; price of gas is closely watched. When prices get too high or too low, government may intervene with policies intended to cap consumer costs and spur economic activity.
Producer Price Index (CPI) — Prices paid at the store, the Producer Price Index (PPI) considers what wholesalers pay for U.S. goods and services (food and energy, not factored). Wholesale prices influence consumer prices; PPI can be a useful predictor of impending inflation.
U.S. Import and Export Price Indexes — Our nation relies on foreign trade to sustain economic activity. Price we charge foreign trading partners for goods and services, can reveal a good deal about our economic standing. Fluctuations in supply and demand, competition and stability of our global partners make these measures more vulnerable to variability.
Productivity and Costs — Productivity statistics tell how well our economy is working. When businesses are able to do more in less time, profits rise, in turn paves the way for more investment, more jobs and prosperity.
Real Earnings — Looks at real average hourly earnings to estimate consumer-buying power. Comparing real earnings to the CPI, shed light on how far the U.S. dollar can go.
New Construction — Housing starts and building permits are regularly monitored by the financial industry, they reflect both business growth and consumer confidence.
Employment Situation — Stock market tends to perk at announcement of new hires and fewer unemployment claims. Investors like a healthy economy. Job security also tends to give consumers more confidence.
Visit the Bureau of Economic Analysis at www.bea.gov and U.S. Census Bureau at www.census.gov. Apply what you learn with your financial advisor, who can help you consider important financial decisions.
Michael W. K. Yee, CFP
1585 Kapiolani Blvd., Suite 1100, Honolulu
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Michael W K Yee, CFP®, CFS®, CRPC®, is a Financial Advisor CERTIFIED FINANCIAL PLANNER practitioner™ with Ameriprise Financial Services, Inc. in Honolulu, HI. He specializes in fee-based financial planning and asset management strategies and has been in practice for 26 years.
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