Key Economic Indicators Every Investor Should Know
When an individual stock moves up or down, this might be the result of a corporate announcement or developments within a particular industry. But major changes in leading U.S. indexes such as the Dow Jones Industrial Average or the S&P 500 can indicate a wider shift in investor sentiment, which might be driven by broader trends in the domestic or global economy. Such changes can often be revealed by economic indicators reported on a periodic basis.
There are dozens of key economic indicators in the U.S. alone, and market responses are often about more than just the monthly or quarterly data. How an indicator compares to a prior month or year, as well as how a reading comes in relative to expectations, is also critical. Here are some frequently cited economic indicators:
Real Gross Domestic Product (GDP)
Nominal GDP measures the entire value of a country’s goods and services produced; real GDP adjusts that figure for price changes. Essentially, an increase in GDP might not reflect the true growth in an economy or an increase in purchasing power if the price of goods and services is also rising. To get an accurate growth percentage, real GDP subtracts the inflation rate from nominal GDP.
Both nominal and real GDP are reported quarterly by the U.S. Department of Commerce's Bureau of Economic Analysis (BEA). When real GDP increases, it suggests businesses are producing a higher value of goods and services, generally understood as making more money and suggesting an increasing standard of living. If real GDP declines, then the reverse is believed to be true.
Labor Market Data
On the first Friday of every month, the U.S. Department of Labor's Bureau of Labor Statistics (BLS) releases the nonfarm payrolls figure, representing the total number of workers employed by U.S. businesses, excluding farm workers, private household workers, nonprofit organization employees, active-duty military, and employees of certain government agencies. The data is generally expressed in the cumulative number of new or lost positions.
On the same day, the BLS also releases the unemployment rate, determined through a monthly survey of eligible households that are considered representative of the U.S. population. It estimates the percentage of Americans who were unemployed in the survey’s reference period and who made specific efforts to find employment, but it doesn’t include those who are not looking for work.
It’s commonly thought that if more businesses are hiring, then companies are performing well, leading to predictions that more people will have more money to spend (as a consequence of being employed). Conversely, when the unemployment rate rises unexpectedly—or even when it declines but less than expected—that might suggest that cash-strapped employers are tightening their belts.
Inflation Reports
The Consumer Price Index (CPI) is a monthly measure of the prices of a basket of specific goods and services bought by urban consumers, including food, transportation, clothing, medical care and more. It’s published monthly by the BLS and helps economists gauge inflation—increases in the general price of goods and services in the U.S.
The monthly Producer Price Index (PPI) measures the price changes from the seller’s perspective, tracking price changes in output of nearly all industries in the goods-producing sectors of the U.S. economy. PPI can be used to gauge inflation before it reaches consumers, as producers tend to pass any price changes onto consumers.
The Personal Consumption Expenditures Price Index (PCE), released monthly by the BEA, reflects changes in the prices of goods and services purchased by U.S. consumers. The PCE is part of the monthly Personal Income and Outlays report and is the preferred inflation measure of the U.S. Federal Reserve. Besides being released later in the month, the PCE differs from the CPI in several ways, including the weighting of certain categories, calculation processes and the scope of each index.
Consumer Confidence and Consumer Sentiment
The Conference Board releases its Consumer Confidence Index on the last Tuesday of every month, based on a monthly survey asking consumers how confident they are about current and future labor markets and business conditions.
The University of Michigan publishes a similar, albeit more detailed measure, the Consumer Sentiment Index, which gauges consumer expectations regarding the overall economy.
Increases in consumer confidence and sentiment are sometimes associated with rising equity markets, as an increase might suggest that confident consumers will spend more, helping the economy to grow and eventually leading to stronger corporate earnings.
Retail Sales
The retail sales report is a measure of all sales by U.S. retail stores, published monthly by the U.S. Department of Commerce's Census Bureau. Typically rising sales means consumers are spending more. However, the report isn’t adjusted for price changes, and any rises or falls can also be attributable to inflation.
Durable Goods Orders
Durable goods orders measure current industrial activity and refer to manufactured items from both businesses and consumers that typically aren't replaced for at least three years. The Department of Commerce's Census Bureau publishes its durable goods report near the end of each month. An increase in durable goods orders is usually taken as a sign of economic health and could be associated with increases in stock indexes, while repeated declines might indicate trouble in the economy.
Federal Reserve Interest Rate Announcements and Meeting Minutes
One of the most closely watched calendar items on Wall Street isn't an economic indicator but rather the regularly-scheduled announcement of changes (or lack thereof) to the target range for the federal funds rate—the rate banks charge each other to borrow money maintained at the Fed overnight—by the Federal Reserve. The Federal Open Market Committee (FOMC), which is the monetary policymaking body of the U.S. central bank, holds regularly scheduled meetings eight times a year. Since banks often pass on their borrowing costs to their customers, lower rates can encourage borrowing and stimulate the economy.
Purchasing Manager Indexes
The Purchasing Managers’ Index (PMI) is a monthly survey sent to senior executives across various industries. Through questions about new orders, production, employment, inventory levels and supplier deliveries, the survey seeks to determine the future direction of the manufacturing and service sectors. When compared to the month prior, a PMI below 50 indicates that economic activity is contracting, while a PMI over 50 means that economic activity is expanding. Both S&P Global and the Institute for Supply Management conduct and release their own surveys on a monthly basis.
