The amount of time devoted to economicspeculation probably hasn'tescaped your attention. Turn on any financialnews program during the day andyou're likely to hear at least 1 economicforecast. Although some analysts enjoybasing their predictions on trivial factors,like the alignment of the stars, most basetheir outlooks on economic indicators.
Economic indicators help forecastwhere the economy is headed, based ondata reflecting either economic performanceof the recent past or expectedfuture performance. But exactly whicheconomic indicators should physician-investorspay close attention to nowadays?The following is a list of economic indicatorsthat experts follow closely to determinestocks' economic outlooks:
• Stock market. This is one of theleading, and sometimes overlooked, economicindicators. The stock market usuallyprovides investors with a 3- to 6-monthforward view of the economy. When usingthe market as an indicator, it is importantto look at its long-term performance andnot the daily swings.
• Unemployment rate. This monthlyrate shows what percentage of thecountry's work force is unemployed at agiven time. A declining rate is a goodsign for the economy. If this indicator islow, it means companies are hiring againand creating more jobs for workers.More jobs translate to higher productivityand higher overall revenue.
We have seen such low rates of unemploymentin the past few years that themost recent recession's rate, 5.8%, seemsvery high, even though it was lower thanthe rate of any other recession we havehad. In general, an unemployment rateabove 5% is considered high and a ratebelow 5% is considered low.
• Retail sales. Another monthlyeconomic indicator, retail sales measurethe strength of consumer spending andthe demand for the goods that companiesproduce. This tells us how muchpeople are willing to buy, and what thedemand is for goods and services.
To have a strong and healthy economy,retail sales figures should go up with time.Economically speaking, it is not good tosee consumers cutting back and spendingless. If the demand is low, companies willbegin producing less. A continued gain insales is ideal. Economists sayretail sales are now running a bit ahead ofwhat the figure was a year or so ago.
• Interest rates. Interest rates determinehow much it will cost to borrowmoney for both near- and long-term purchases,which affects consumer purchases.The Federal Reserve meets every 6 to7 weeks to discuss possible changes ininterest rates, among other topics. Forexample, when interest rates are goingdown, it is usually a sign that the fed istrying to help jump-start the economy bymaking money cheaper to borrow.
It often takes some time for lower ratesto help improve the economy, as morethan 1 rate cut is usually required to see asignificant effect on the economy. Thenumber of changes by the fed is not asvital as the size of the changes. Forinstance, if rates are cut too low, it couldcreate inflation and the economy couldoverheat. On the other hand, rising interestrates are a sign that the economy isstrong and does not need help.
Many economists believe we have ahealthier economy now than 20 yearsago, mainly because we have better controlover inflation today. As long as inflationis not stealing the purchasing powerfrom consumers, consumers are able tospend more, allowing companies to producemore for people to consume, whichcan mean good news for both the economyand the stock market.
Joseph F. Lagowskiis vice president,
investments, and a financial consultant with A.G.
Edwards in Hillsborough, NJ.
He welcomes questions or
comments at 800-288-0901 or
article was provided by A.G. Edwards & Sons,
Inc, member SIPC.