How to check the pulse of the current economic climate
Financial geeks revel in collecting and interpreting mountains of economic data in an effort to divine future performance and gain an advantage in investment selection. Here’s a dirty little secret: Prognostication is a fool’s errand, and few have consistently forecasted the future of financial markets. Nobel Prize-winning economist Paul Samuelson quipped that the stock market has predicted nine of the last five recessions, and numerous studies have shown that professional market forecasters are about as accurate as a random guess.
Still, for the nonprofessional, it is useful to have a basic grasp on where the economy stands at a moment in time and the general direction over the near term. Here are a few important but handy indicators that should help you filter out the noise and capture the essence of the current economic climate.
The most widely followed metric is real GDP or gross domestic product adjusted for inflation. The U.S. Department of Commerce tallies up total output of goods and services in the U.S. It is reported each quarter and stated as an annual rate of growth. During the first quarter of 2018, the U.S. economy grew at an annualized pace of 2.2 percent after inflation, roughly in line with the average growth since 2009. The growth rate has lagged the long-term average of 3.2 percent owing to demographic factors and a slowdown in productivity growth, but anything over 2 percent is acceptable.
The labor market provides another clue. The U.S. Bureau of Labor Statistics conducts monthly surveys to estimate the number of new jobs created and the demand for workers. The United States is currently generating around 200,000 new jobs per month, a very robust level consistent with an expanding economy. Meanwhile, the rate of unemployment among eligible and willing workers stands at just
3.8 percent (and only 3.1 percent in metropolitan Chattanooga). Economists tend to think of 4 percent as the equilibrium level, suggesting that labor shortages may be emerging. This, too, is evidence of a strong and growing economy.
Prices also convey important information about the economic environment. The consumer price index, or CPI, is also compiled by the Labor Department and measures the change in price levels for a representative collection of goods and services purchased by average consumers. Economists generally like to see an average annual increase of 2 to 2.5 percent to support stable long-term growth. Inflation usually begins to accelerate as the economy heats up, and can snuff out a growth cycle if it gets out of hand. After several years of sub-2 percent inflation, the CPI has risen by 2.8 percent over the past 12 months. Levels above 3 percent are cause for concern and will trigger policy action by the Federal Reserve that serves to tamp down inflation but also slow the economy.
Finally, monthly changes in retail sales provide a glimpse of basic demand on the part of consumers. Consumption spending makes up fully two thirds of U.S. gross domestic product, or GDP, so changes in spending habits provide clues regarding the strength of the economy. The U.S. Bureau of Census issues monthly reports detailing month-tomonth changes as well as year-over-year movements. Annual growth in retail sales above the level of inflation indicate continued expansion. Recent data has shown about 5 percent growth over last year, again consistent with good economic health.
There are literally hundreds of data points routinely followed by analysts and economists. For the rest of us, this short list of well-reported indicators provide a quick snapshot of the general state of the economy. Keep an eye on GDP, jobs, inflation and retail spending and you will have a decent handle on the state of things.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.