It seems as if every day we are plagued with yet another economic indicator telling us how bad things are. Housing starts are the lowest in 15 years; consumer confidence has hit a new low; inflation is bearing down on the American consumer—no wait, it is deflation we must be concerned about. The latest, of course, states that we have been in recession since December 2007. Of course, how you measure these indicators and by what standard makes all the difference in the world.
Have you ever wondered just what some of these leading economic indicators are and why they are seen as either good or bad?
In its purest form, they provide a snapshot of our economic health at any point in time. Put together, they can help define a trend that may be useful for business planning, governmental policy and somewhat of a report card on how we are faring as a nation. At its worst, it can often lead to excess exuberance or panic, or be used to make political points to push certain agendas.
With that in mind, it may be useful to look at what some of the most widely quoted indicators are, and why the media focuses so much attention on them. Then you can be the judge as to whether they spell doom and gloom, or recovery and prosperity.
Real Gross Domestic Product (GDP)
Real GDP is the final value of all goods and services produced by labor and property in the United States. It is a “macroeconomic” indicator, meaning it is our broadest measure of economic activity. It tells us how much as a nation we are producing, market value wise, at any point in time. It is called “real” because each period’s data is adjusted for price changes or inflation. When GDP is rising, we are growing as an economy; when it falls, we are shrinking. Typically, two-thirds of this number is from consumer spending, not business or government spending. Often this is the basis of deciding when we are in a recession. The most often cited trend states that if there are any two consecutive quarters of negative growth, we are in a recession. In reality, there is a private, non-profit committee, the NBER (National Bureau of Economic Research), that focuses on understanding the U.S. economy. They take into account GDP movement as well as many other indicators, such as, employment, personal income and industrial production to decide if we are in a recession. GDP replaced GNP (Gross National Product) as the primary measure of U.S. production in 1991.
Consumer Price Index (CPI)
The CPI measures changes in the average prices paid for a “basket” of goods and services by urban or metropolitan consumers. The goods included in this basket represent more than 200 categories, arranged in eight different groups. They include food, housing, clothing, transportation, medical care, recreation, education, and other goods and services. The number is derived from surveys conducted by the Bureau of Labor Statistics. Approximately 7,000 families essentially keep a diary of every expenditure in their household during a two-week period. In addition, there are also quarterly surveys done. How CPI moves up or down is most typically used to indicate inflation or deflation in our economy.
The Consumer Confidence Survey
The Consumer Confidence Survey is a monthly report that details consumer attitudes and buying intentions by age, income and region. The survey is done by The Conference Board, a non-profit consumer research organization. This is a gauge of typical consumers’ attitudes on the health of their personal economic well-being and their optimism (or pessimism) of the future. The survey is conducted on a random sampling of more than 5,000 households. These households are asked to comment on whether they feel the business environment is good or bad, and whether they feel their income has a good chance of rising or falling. This “leading” indicator, or statistic, is used most often to gauge whether the consumer is likely to spend now or wait to make purchases.
Housing starts are compiled by the U.S. Department of Commerce and the U.S. Census Bureau. They indicate the number of privately owned housing “units” on which construction has been started. The data is derived from surveys of homebuilders across the nation. Statistics of building permits obtained and houses completed are also included in this survey. These figures are used as a leading indicator of economic health and often help identify business cycles in the economy. As people buy new homes, the anticipation is that other economic activity will benefit from this change. People who buy new homes will often buy furniture, lawn equipment and garden supplies. This data makes its way into policy-making decisions of the Federal Open Market Committee (FOMC). This is the committee seen on the news as it testifies before Congress each month, discussing interest rates and the economic health of the United States.
Oftentimes the best indicator is how your personal household economy is doing. Are you doing what is right for you and your family? Are you living within your means? Do you have a plan for your retirement, and if so, are you saving enough money? As always, statistics can be used to make any point the deliverer wants to make. It is important to always learn the facts before making a judgment, and to create a plan for your own life while being aware of what others around you are doing.