The WSJ Guide to the 50 Economic Indicators That Really Matter

1. Economic indicators are vital tools for predicting market trends and making informed investment decisions

"If you want to know where the economy has been, where it is, and where it is headed, start here!"

The power of economic indicators. Economic indicators are statistical measures that provide insights into the health and direction of an economy. They serve as crucial tools for investors, policymakers, and businesses to make informed decisions. By analyzing these indicators, one can anticipate economic trends, identify potential investment opportunities, and mitigate risks.

Types of indicators. Economic indicators can be classified into three main categories:

• Leading indicators: Predict future economic events (e.g., housing permits, stock market performance)
• Coincident indicators: Reflect current economic conditions (e.g., GDP, employment rates)
• Lagging indicators: Confirm long-term trends (e.g., unemployment rates, corporate profits)

Using indicators effectively. To maximize the value of economic indicators, it's essential to:

• Monitor multiple indicators for a comprehensive view
• Understand the context and limitations of each indicator
• Look for trends and patterns rather than isolated data points
• Consider the interplay between different indicators

2. Consumption indicators provide insights into consumer behavior and economic health

"Americans love to consume stuff, and consumption is a vital part of our overall economic well-being."

The importance of consumption. Consumer spending accounts for approximately 70% of the U.S. economy, making it a critical driver of economic growth. Monitoring consumption indicators helps investors and policymakers gauge the overall health of the economy and anticipate future trends.

Key consumption indicators include:

• Automobile sales
• Chain store sales
• Consumer sentiment
• Existing home sales
• Underemployment or slack

Interpreting consumption data. When analyzing consumption indicators, consider:

• Long-term trends rather than short-term fluctuations
• Seasonal variations in consumer behavior
• The impact of external factors (e.g., government policies, global events)
• The relationship between different consumption indicators

3. Investment indicators reveal business confidence and future economic activity

"Because semiconductors are used in so many cool gadgets, both at home and in the workplace, we can gain some insight into the health of the broad economy generally, and more specifically into some parts of the tech sector, by looking at the health of the semiconductor business."

Business investment as an economic barometer. Investment indicators provide valuable insights into business confidence and future economic activity. By monitoring these indicators, investors can anticipate shifts in economic cycles and make informed decisions about sector-specific investments.

Key investment indicators include:

• Book-to-bill ratio (semiconductor industry)
• Copper price
• Durable goods orders
• Housing permits and starts
• Industrial production and capacity utilization

Analyzing investment data. When interpreting investment indicators:

• Look for trends across multiple indicators
• Consider the impact of technological advancements on traditional indicators
• Evaluate the relationship between business investment and consumer spending
• Account for industry-specific factors that may influence investment patterns

4. Government spending and deficit indicators offer clues about economic stability and future growth

"When government spends more money than it receives in the form of tax revenues, the result is called a deficit. It's like a gaping hole in the budget."

The role of government in the economy. Government spending and deficit indicators provide insights into fiscal policy, economic stability, and potential future challenges. These indicators can help investors anticipate changes in interest rates, inflation, and overall economic growth.

Key government indicators:

• Federal government budget deficits
• National debt levels
• Government spending patterns

Interpreting government data. When analyzing government indicators:

• Consider the long-term implications of deficits and debt
• Evaluate the impact of government policies on different economic sectors
• Assess the relationship between government spending and private sector activity
• Monitor changes in tax policies and their potential effects on businesses and consumers

5. Net export indicators shed light on global economic dynamics and currency movements

"The current account is technically the trade balance plus net income from interest and dividends plus net foreign aid."

The importance of international trade. Net export indicators provide insights into a country's competitiveness in the global market, currency valuations, and overall economic health. These indicators are particularly valuable for investors interested in international markets and currency trading.

Key net export indicators:

• Baltic Dry Index
• Big Mac Index
• Current account deficit
• Oil inventories
• Tankan Survey
• TIC data

Analyzing net export data. When interpreting net export indicators:

• Consider the impact of exchange rates on trade balances
• Evaluate the relationship between exports and domestic economic growth
• Assess the influence of global economic conditions on trade patterns
• Monitor changes in trade policies and their potential effects on specific industries

6. Multiple component indicators provide a comprehensive view of economic health

"The ADS index may be used to compare business conditions at different times."

The power of comprehensive indicators. Multiple component indicators combine various economic measures to provide a more holistic view of economic health. These indicators are particularly useful for investors seeking a broad understanding of economic conditions and potential turning points.

Key multiple component indicators:

• Beige Book
• Crack spread
• Credit Availability Oscillator
• Federal funds rate
• GDP per capita
• Yield curve

Interpreting multiple component data. When analyzing these indicators:

• Consider the relative weights of different components
• Look for divergences between components that may signal economic shifts
• Evaluate the historical performance of the indicator in predicting economic trends
• Use multiple component indicators in conjunction with more specific economic measures

7. Inflation, fear, and uncertainty indicators signal potential economic turbulence

"When the VIX spikes up over 20% in a day, it's often a very good time to buy the market, regardless of whether we are in a bull or bear market."

The impact of sentiment on markets. Inflation, fear, and uncertainty indicators provide valuable insights into market psychology and potential economic turbulence. These indicators can help investors anticipate market volatility and make more informed risk management decisions.

Key inflation, fear, and uncertainty indicators:

• GDP Deflator
• Gold price
• Misery Index
• Producer Price Index
• CBOE Volatility Index (VIX)
• TIPS spread

Using sentiment indicators effectively. When interpreting these indicators:

• Look for extreme readings that may signal market turning points
• Consider the relationship between different sentiment indicators
• Evaluate the historical context of current sentiment levels
• Use sentiment indicators in conjunction with fundamental economic data for a more comprehensive analysis

Last updated: July 28, 2024