If you listen to the news, you’ll regularly hear mention of key economic indicators as they’re released. This is where a lot of us zone out because it’s hard to know how the ups and downs of these indicators relate to the overall health of the economy. What does it mean that the GDP in China declined last quarter or that U.S. jobless claims are up this week?
Every major country in the world regularly releases information to the public regarding economic growth and the health of its economy. In the United States alone, multiple data points are released on a daily basis. But which factors are most important in evaluating the growth of the economy and its future prospects?
If you’re an investment professional or managing your own portfolio, most of the data points are useful and/or necessary to monitor, however, if you lack the time to sort through heavy amounts of news and data, there are a few key releases that are helpful in forming a broad understanding of where the U.S. economy may be headed. Let’s break down some common economic indicators.
- Quarterly Gross Domestic Product (GDP)
The Bureau of Economic Analysis, part of the U.S. Department of Commerce, releases the Gross Domestic Product (GDP) report on a quarterly basis. It measures the value of the goods and services produced less the value of goods and services used in production in the United States during the previous quarter. In short, it reflects the growth in the domestic economy on a backwards looking basis. The Bureau reports annual year-over-year growth and annualized quarterly growth. GDP is made up of personal consumption (consumer spending), gross private domestic investment, net exports of goods and services, government consumption expenditures, and gross investment.
Reviewing the quarterly GDP report will help you to understand the health of the domestic economy through the last quarter. You can also watch the trend of growth to see if it is accelerating or slowing. When the pace of growth slows significantly, it may mean that a recession will occur in the near future. The technical definition of a recession is two quarters of negative GDP growth. It may also be interesting for you to watch the underlying components of GDP growth. For example, if personal consumption is strong, it likely means that people in the country have jobs, their wages are rising and are spending more. If gross private domestic investment is growing, it means that businesses are investing more into the future.
- Weekly Jobless Claims
The U.S. Department of Labor releases a weekly Unemployment Insurance Claims Report each Thursday morning. This is an important report to watch because it provides a real-time view of the U.S. employment situation. The report details the weekly initial jobless claims and continuing jobless claims. Initial claims track how many new individuals filed for unemployment benefits for the first time in the past week and the continuing claims number measures those who have already filed for two or more consecutive weeks. A spike in these numbers for a series of weeks may indicate real-time economic deterioration. As long as the claims remain low and steady, consumers should have the ability to spend.
- ISM Manufacturing Index
The Institute for Supply Management (ISM) index measures recent U.S economic activity. The core of the index is the result of a survey of purchasing managers at more than 300 manufacturing firms (often called the Purchasing Managers Index, or PMI). It measures the change in production levels from month-to-month. It is a composite index and gives equal weights to seasonally-adjusted new orders, production, employment, supplier deliveries, and inventories. A reading above 50 indicates expansion in the manufacturing portion of the economy versus the prior month, while a result below 50 represents contraction. The ISM manufacturing index is released on the first day of each month and is important in supporting business and investor confidence. The non-manufacturing index is released a few days later.
- Consumer Price Index (CPI) Report
The Bureau of Labor Statistics, part of the U.S. Department of Labor, releases the Consumer Price Index (CPI) report on a monthly basis. It measures the average change over time in prices paid by urban consumers for a market basket of consumer goods and services, also called inflation. The statistic is reported in total items, excluding food and energy due to their more volatile nature. The ex-food and energy statistic is key to understanding the underlying inflation in the U.S. economy because the Federal Reserve Board’s (the Fed) dual mandate includes stable prices. Therefore, if the CPI indicator moves too far from its 2% target, it may lead the Fed to tighten or loosen monetary policy. The Fed executes tightening by raising the Federal Funds Rate and loosening by lowering it.
- FOMC Meeting Releases
The Federal Open Market Committee (FOMC) holds eight regularly scheduled meetings during the year. It gives a summary including any decisions on interest rates immediately following the meeting along with expectations for economic growth, employment, and inflation. Three weeks later, the committee releases the full minutes of the meeting. These minutes are important to follow because they give a roadmap for what the Fed Funds Rate and the Fed’s balance sheet may look like going forward. The Fed’s use of these tools is powerful in accelerating or slowing future economic growth.
These reports should help give you perspective on the state of the economy, as well as plenty of fodder for your next social gathering!