Money Matters

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Understanding economic indicators and how they impact you

Provided by RBC Wealth Management 

and Dave Dupont

Every week we see dozens of economic reports and indicators providing us with a fresh look at the economy.

While most of these reports have the potential to move the market and investment accounts, relatively few people understand their meaning.

As a starting point, there are three categories of indicators – leading, lagging or coincident. Leading indicators change before the economy changes and are one of the most important to investors in gauging how the economy will perform in the future. Lagging indicators do not respond until a few quarters after the economy changes direction. And finally, coincident indicators move in tandem with the economy.

Here’s a look at some of the important economic reports and how they move the economy and the markets.

Gross Domestic Product: Measured annually, but updated quarterly, GDP represents the value of goods and services produced in the United States. Probably the broadest indicator of economic output, GDP indicates how quickly the economy is growing or shrinking. If GDP growth doesn’t meet or beat market expectations, stock prices often temporarily decline.

Consumer Confidence Index: Considered one of the most accurate indicators of confidence, this index is based on a survey sample of 5,000 households asked how they feel about current and future economic prospects. It represents a leading indicator.

Consumer Price Index: Widely used to track inflation, the CPI measures the cost of a predetermined basket of consumer goods and services and is another leading indicator.

Producer Price Index: Not as widely used as the CPI, the PPI is a monthly report of what producers earn for their finished goods – that is, what are they receiving on the wholesale market. A PPI reading can sometimes predict what’s to come with the CPI.

Housing Starts: This tracks how many new single-family homes or apartments were constructed during a month, determined mainly by applications and permits for building homes. While the statistic does not usually affect the stock market, housing represents a huge portion of overall investment dollars.

Purchasing Managers Index: A composite index based on new orders, inventories, production, supplier deliveries and employment, this index gives a snapshot of what is happening in the manufacturing sector. A number above 50 shows an expansion, below indicates a contraction. It serves as a leading indicator for the economy as a whole.

Retail Sales: This measure tracks merchandise sold within the retail sector, such as grocery stores, clothing chains and electronics stores. Retail sales are important in determining the health of the economy. These results can also have an impact on the market, especially retail stocks.

 

This article is provided by Dave Dupont, a Financial Advisor at RBC Wealth Management. RBC Wealth Management does not endorse this organization or publication.

 

RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC

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