List of Economic Indicators to Guide Your Investment Decisions

Economy, Investing



Economic indicators are useful in telling us whether the economy is doing well or not.  They indicate whether an economy is heading in or out of a recession, or if the economy is experiencing a boom.  There are a lot of economic indicators and sometimes they may contradict one another.  Thus, it is important to look at the overall economic environment using multiple indicators to get a clearer picture of how the economy is doing. The following is a list of 27 economic indicators you can use to make investment/business decisions.  

There are three types of economic indicators; they are either leading, lagging, and/or coincident.  Leading economic indicators are trends that change before the economy starts to trend or pattern.  Lagging indicators are indicators that change after the economy has started a trend or pattern.  Coincident indicators are indicators/trends that change around the same time the economy as a whole does.

The following selected indicators are taken from the Wall St. Journal book Guide to the 50 Economic Indicators That Really Matter. It is a great book that you can skim through in a couple of days but it contains a lot of information that you can use to guide your investment decisions.  There are 50 indicators in the book, but I have only included 27 for the sake of brevity.  For information on the rest of the indicators, I highly suggest buying the book.

This article is separated into 3 pages for easier reading.  Locate the links to the other pages at the  bottom.

1) Economic Indicator: Car Sales

Type of Indicator: Leading into recession and coincident with economic recoveries

What it means: Cars are a purchase that includes huge payments for the next 3-5 years.  So if people are buying cars, that means they are confident about their future job prospects.  If they are not buying cars, it means they are wary of their future employment prospects.

What to look for: If automobile sales are trending down, that is a sign that people are tightening their wallets to brace for a tough economy.  People stop buying new cars when they do not feel as confident about their jobs and promotion potential and are more likely to settle for their current car. If new car sales are trending down, that could be a sign that tougher times are coming.  If new car sales are trending up from a valley, that is a sign that the economy is recovering from tough times.

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What to do: Consider moving your money to safer assets when auto sales are trending down.  Move your money into riskier assets as car sales start trending up.

Where to look: Auto sales figures are released on the first of each month. You can find it at the Bureau of Transportation site.

2) Economic Indicator: Chain Store Sales

Type of Indicator: Coincident

What it means: If stores are doing well, it means people have enough money to spend on small purchases.  If stores are not doing well, people do not have money for discretionary spending.

What to look for: Be on the lookout for month-to-month sales numbers as well as year-to-year sales figures for stores across various sectors.  If sales are increasing, that means people are spending.  If sales are decreasing, it means that people are tight with their money.

What to do: Buy and sell assets based on expected sales figures from stores. If the trend is downward across a broad set of sectors, it may be time to get rid of risky assets. If trends are upward in multiple sectors, things look good.

Where to look: Look at the ICSC-Goldman Store Sales Index

3)  Economic Indicator: Consumer sentiment

Type of indicator: Leading

What it means: Measures how consumers feel (exuberant or cautious)

What to look for: Increase or decrease in consumer sentiment over a few consecutive months.

What to do:  Consumer sentiment has a big effect on retail stocks.  If you think consumer sentiment is going to keep going up, buy retail stocks.  If you think it is going to keep going down, either short or sell retail stocks.

Where to look: http://briefing.com and http://conference-board.org

4) Economic Indicator: Existing home sales

Type of indicator: Leading

What it means: The economy is either going to head up or down depending on the direction of the sales numbers.

What to look for: Increase in existing home sales means that the economy will likely head back up and a decrease in existing home sales means the economy might go into a slump or drift into a further slump.

What to do: If the housing market is picking up, invest in assets that are sensitive to good economic news, such as stocks. If a housing market is starting to turn around and come back from a valley, it may be time to invest in housing. If housing sales decrease, buy safer assets such as bonds or fixed securities. In addition, if you must own stocks, choose stocks whose sector will be largely unaffected by bad news or economic uncertainty. With a downward trend in housing sales, it is important to avoid owning assets related to real estate (such as REITs and construction).

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Where to look: http://realtor.org/research/research/phsdata

5) Economic Indicator: Underemployment/slack

Type of indicator: Leading into recessions and lagging in recovery

What it means: This number measures how many people work part time because they are unable to find a full-time job.   This number is indicative of the economy’s future.  For instance, employees will get fewer hours before actual layoffs begin and employees will get more hours before hiring picks up.

What to look for: If underemployment is increasing, it means the economy is weakening.  If underemployment is decreasing, it means the economy is getting stronger.

What to do: The WSJ recommends buying defensive stocks such as big pharmaceuticals, food, and alcohol when there is an increase in underemployment.  If there is a decrease in underemployment, then buy a broad sector of stocks.

Where to look: Go to this BLS page and look under “Employed Persons by Class of Worker and Part-time Status”

6) Economic Indicator: Book-to-bill Ratio

Type of indicator: Leading

What it means: This is a measure of the health of the semiconductor business but has great implications for the economy as semiconductors are used in almost every business.

What to look for: A book-to-bill ratio of 1.0 or higher is generally favorable.  It means that orders are greater than what the industry is able to fulfill (demand is greater than supply), so there is a backlog of orders waiting to be filled.  It means that business are ordering stuff.  A number lower than 1.0 means that there are more chips available than are ordered/sold.

What to do: Buy stocks in tech companies that are hardware-based, and specifically chip manufacturers if the ratio is 1.0 or above (or trending up).  Sell them if the ratio is less than 1.0 (or trending down).

Where to find the number: The Semiconductor Industry Association publishes book-to-bill ratio around the middle of each month for the previous month’s data.

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7) Economic indicator: Copper price

Type of indicator: Leading

What it means: Copper is a major component of the industrial sector.  High copper prices correlate strongly with the health of the housing market, infrastructure spending, and manufacturing.  The price of copper is stable so as demand for copper increases, the price goes up.

What to look for: Increase or decrease in copper prices.  Increase in price is good news while decrease in price is bad news.

What to do: If there is a price increase brought on by an increase in demand, invest in manufacturing, infrastructure, and copper stocks.  As prices decrease due to decreased demand, get out of those sectors.

Where to look: http://lme.co.uk

8) Economic indicator: Durable goods orders

Type of indicator: Leading

What it means: Durable goods are big ticket items that do not wear out (they are durable).  They include home appliances, consumer electronics, and furniture.  Examples of durable goods include refrigerators, freezers, washing/drying machines, television, computer, car, iPad, etc. Durable goods for businesses means capital equipment that is built to last awhile.  This includes tractors, trucks, operating machinery, etc.  In other words, durable goods for businesses means durable items that allow them to operate.

What to look for: Increase or decrease in durable goods orders over a 3-5 month period.

What to do: Buy or short stocks in various sectors depending on which way durable goods is trending.  You may also concentrate your stock portfolio and just short/buy manufacturing/consumer stocks depending on direction of durable goods orders.

Where to look: http://census.gov/manufacturing/m3/

9) Economic Indicator: Housing permit and starts

Type of indicator: Leading

What it means: When housing permits and starts are increasing, it means that the economy is heating up.  The opposite is true when there is a decrease in housing permits and starts.

What to look for: You should look for trends and instead of an increase or decrease month-over-month.  Look for increases/decreases over the course of several months.

What to do: When increases in housing permits and starts are anticipated, buy stocks that are specific to the home-building sector.  When housing permits and starts decrease, short stocks in the home-building sector.

Where to look: http://census.gov/const/www/newresconstindex.html 

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