To determine the state of health for the economy, economic indicators give us a good look at the direction things are headed. A basic knowledge of what they are and what they mean is important for all investors.
There are three types of indicators. The return of the stock market is called a leading indicator because it signals a shift in the economy before it actually occurs. It usually heads down before the economy starts to tank and moves upward prior to the economy rebounding. In this cycle, the Dow Jones Industrial Average bottomed out in March of 2009 and headed upward until late last fall. This would be considered a good sign for the economy. Since then, however, the market has tended to move in a sideways fashion, giving neither a positive nor a negative signal. Just when you think you’ve got something going, a point of indecision is reached. Luckily though, stock market activity is revealed daily, so we don’t have to wait around to detect change.
The unemployment rate is reported monthly and is called a lagging indicator. An indicator of this type shows the result of economic movement. For example, if the economy is experiencing a decline, employment increases as people get laid off from their jobs. During the recent past, unemployment stood at 4.4% in March 2007. I think most people were working as real estate agents. A year later the unemployment figure had broken 5% and as we moved deeper into recession, things got only worse. By February 2009, the indicator was at 9.4% and peaked in November at 10.2%. Putting it in perspective, the peak of the 2001 recession was 6.3% in June of 2003, and we’d have to go back all the way to 1983 to find unemployment at the 10% level. Do you even remember the recession back in 1983? Of course you don’t and that in itself is a great indicator since not only has it slipped from your mind, you somehow struggled through it, and that means you’ll probably get through this recession as well. You’ll probably even forget about it sometime in the future.
Today, the OMB projects that at the end of 2010 the unemployment rate will be at 9.7%. While not a reason to break out the bubbly, the indication does project a recovering economy.
Which brings us to the third type, the coincident indicator. The Gross Domestic Product is an example. The GDP, measured quarterly and released by the Bureau of Economic Analysis (BEA), represents the total value of all goods and services produced within the United States. As a coincident indicator, it moves at relatively the same time and in the same direction as the economy. In the current recession, GDP contracted through the second quarter of 2009 and then turned upward for the third and fourth quarters.
From the recent movement of these indicators, we can see what seems to be a reasonably good outlook for recovery. Our leading indicator, the stock market, has mostly risen since March 2009. Our coincident indicator, the GDP, followed by turning upward late in 2009. Finally, our lagging indicator, the unemployment rate, is at least projected to go down in 2010.
But hold on here a minute. We haven’t found the end of the rainbow just yet. For the recovery to really gain traction, the consumer has to start spending and spending big time. Although retail sales (another indicator) in 2009 were generally up from the previous year, 2008 did not exactly set a high hurdle to beat. February 2010 retail sales were the best since 2007, but with higher taxes and continued tight credit on the horizon, a surge in consumer spending may be unlikely.
The many indicators that make up the scope of residential housing are another component of the puzzle to consider. Generally these are lead indicators in a recovery and by now should be heading upward. Unfortunately this is still not the case. Many economists believe it would be difficult to really have a recovery underway without these indicators on board.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.