While we can never be absolutely certain what lies right around the economic corner, that isn’t to say that investors are perpetually blind to the road that lies ahead. In fact, along with distinct economic cycles that have proven to be reliable barometers in the past, four key economic indicators can also be monitored to illuminate economic trends that might ultimately impact your investments.
Although considered a lagging indicator – one where the supporting data trails real-time economic factors by at least a fiscal quarter – looking for trends in unemployment can be very useful in determining which direction the economy might be going. With a historical base rate between 4.3 and 5%, movement either towards or away from that base rate often indicates an expanding or contracting economy. Generally speaking, expanding economies include rising productivity rates that are helpful to corporate earnings and, thus, your equity investments.
Another indicator often used to determine the overall direction the economy might be heading is real income. Real income works in conjunction with inflation to measure your income against the prices of goods and services across a broad spectrum of the economy. While rising inflation is typically associated with an expanding economy and increasing productivity, it also has a negative impact on the purchasing power of your money, and therefore, your real income and overall wealth. Your money simply doesn’t go as far as it would under other circumstances.
Simply put, industrial production measures the gross output of our economy. It is measured in real-time and gauges the overall productivity of the economy. Rising production rates are usually helpful to your investments since they directly correlate with higher corporate earnings and – at least ideally – profitability as well.
Although closely related to production figures, retail sales are also symbolic of consumer confidence. When consumers have a generally positive outlook on the direction the economy might be heading at any given time, they are more willing to spend their money due to that underlying confidence. Again like industrial production, retail sales are closely associated with rising corporate earnings and profits and, therefore, can benefit your investment portfolio.
Although no investor or economist has a crystal ball, collectively, these four key economic indicators can provide significant insights into the economy’s overall health and isolate any economic trends. Investments don’t always track alongside the economy, but you are likely to find a symbiotic relationship between the economy and your investment portfolio over the long term.
Have questions about the direction of the current economy, or need help with your financial plan? We’re here to help! Simply click here or call (763) 445-2772 to schedule a complimentary consultation today!