Leading Economic Indicators

Leading economic indicators are like road signs, pointing to what lies ahead for the economy. We often read or hear about these signposts from so-called financial experts. But these pundits often seem to be out in the fast lane, zooming ahead while we scramble to figure out what was just said. Take a moment to slow down a bit, catch your breath, and understand exactly how these leading indicators will affect your retirement investments.

Consumer Price Index (CPI). This is the rate of inflation. The CPI measures the costs of basics like food, housing, transportation, apparel, medical care, and entertainment. A rising CPI signals higher inflation. When inflation is high, each dollar will buy fewer goods and services. Low inflation means more can be purchased by consumers.

Unemployment Rate. The monthly rise or fall in unemployment is an indicator of economic health. Lower unemployment is usually good news for the economy because more people are working and earning and spending money.

Job Growth. A strong increase in the number of new jobs indicates an expanding economy and tends to boost consumer confidence.

Consumer Confidence Index (CCI). The CCI reflects consumers’ perceptions about the economy and their spending plans. When consumers feel confident, they tend to spend and invest more of their money. However, when they are nervous, consumers tend to hold off on making major purchases.

Housing Starts. When housing starts are high, it means that there has been a lot of construction on new houses, condos, and apartment buildings. Low housing starts could indicate that the economy is slowing down.

Gross Domestic Product (GDP). The GDP measures the total value of all the finished goods and services produced within the United States. A flat or shrinking GDP suggests recession may lie ahead, while a rapidly growing GDP raises fears of inflation. Moderate growth, however, suggests a stable economy.

Reading the Signs

If the leading economic indicators suggest that the economy is slowing down, investors may become wary and decide to sell stocks and bonds. As a result, stock and bond prices may fall. When good economic times are indicated, investors buy stocks because they anticipate that consumers will spend money and corporate profits will rise. As a result, stock prices increase.

Unexpected Signs

Economic indicators are used to predict where the economy is headed. If an indicator comes out in line with market expectation, it causes no reaction. But when an indicator’s results are unexpected, the financial markets may react in a contradictory way. For example, a low unemployment report is generally considered good news, but if investors fear that a tight job market will lead to higher salaries, higher prices, and inflation, the good news can become bad news. Fears of inflation could lead the Federal Reserve to raise interest rates, which lowers spending and leads to lower stock and bond prices. The effect of the economic indicators, then, will depend on the current financial context.

Follow Your Own Lead

The market’s reactions to economic indicators are often short-lived. As a long-term retirement investor, you need to pay attention to your own investment roadmap and not get distracted by misleading signs. If you panic and turn back every time you see a different economic indicator, you will never reach your destination of a financially secure retirement. So shift into gear, move out of the slow lane, and get on with your journey.

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