Economic Indicators

Macroeconomic measures are either gathered by governments or volunteered by businesses. How the information is used and what influence it has are determined by the data itself as well as when and how it was gathered and distributed. Some measures are altered. Some come and go in terms of influence. Others are consistent benchmarks.

For example, the value of all production within a country is known as Gross Domestic Product (GDP). GDP measures products for final consumption or investment. Only the flow of goods and services produced by labor and property within the country itself are included. Growth in the GDP has a positive effect on investment markets, because investors expect rising profits.

High inflation, on the other hand, lowers the purchasing power of the dollar. This in turn lowers investors' valuation of future earnings, thereby lowering price/earnings (PE) ratios and prices of equity investments.

Inflation is measured by the following two indexes:

• The Consumer Price Index (CPI). The CPI measures the average cost of specific goods and services consumed by an urban American family. The CPI is a trailing indicator—that is, it looks backward to tell investors where prices were.
• The Producer Price Index (PPI). The PPI measures the price changes of goods at the wholesale level. The PPI is both a trailing and a leading indicator. While it tells investors what businesses paid for supplies, it also signals future costs to consumers. Other leading indicators include prices for raw materials, the number of unemployment insurance claims filed, and new orders for manufactured goods.

Macroeconomists and investors also pay close attention to unemployment rates, consumer spending, and industrial production. An increase in unemployment signals an economic slowdown—typically a negative for investing. Increases in consumer spending and industrial production have the opposite effect. These are indicators of a strong economy and a healthy investment climate.

These causes and effects are all defined by historical observations. Factors that develop outside historic norms, such as the very long period of economic growth in the United States in the 1990s, can confuse investors. In these cases, cause and effect relationships may change or even reverse. For example, the strong economic factors of the 1990s eventually came to be viewed as inflationary, even though little measurable inflation was occurring at the same time.

Finally, remember that opposite points of view of the attractiveness of any investment usually exist, and their holders usually think they have good reasons based upon their views of the future.