List of Economic Indicators to Guide Your Investment Decisions

[icon name=”icon-star”]This article is separated into 3 pages for easier reading. Locate the links to the other pages at the bottom.

10) Economic indicator: Industrial production and capacity utilization

Type of indicator: Coincident and leading

What it means: Business investment is rising or falling and the economy will very soon follow in the same direction

What to look for: Increases or declines in capacity utilization, keeping in mind a trend over several months

What to do: Buy or short capital equipment suppliers like Fluor (FLR) or Jacobs Engineering (JEC)

Where to look: http://federalreserve.gov/releases/g17/current

11) Economic indicator: Institute for supply management (ISM) manufacturing survey

Type of indicator: Leading

What it means: An increase means the manufacturing sector is growing.  And since manufacturing has such a big part of the overall economy, the economy will soon follow.

What to look for: Increases/decreases in PMI, orders, and employment above the level of 50 (the break-even point).

What to do: Buy or short high beta (high volatility) stocks, especially ones heavily tied to manufacturing.  Pick a stock with a beta over 1.

Where to look: www.ism.ws

12) Economic indicator: Institute for supply management (ISM) non-manufacturing survey

Type of indicator: Leading

What it means: A growth or decline in the service sector industry.

What to look for: Increases/decreases in new orders and/or the headline figure above/below the break-even point of 50.  Look for a several month trend.

What to do: Move to riskier assets such as stocks when it increases and move to safer stocks like bonds when it decreases.

Where to look: http://ism.ws

13) Economic indicator: JoC-ECRI (Journal of Commerce-Economic Cycle Research Institute) Industrial Price Index

Type of indicator: Leading

What it means:  This is a measure of how the industrial sector is doing.

What to look for: Pronounced and persistent movement drive by a large number of industrial commodities

What to do: Buy or short industrial stocks

Where to look: http://businesscycle.com/news/press

14) Economic indicator: London metal exchange inventories

Type of indicator: Leading

What it means: The price of metals can determine the future health of the metal and refining business.  On a wider scale, metals are used by various sectors of the manufacturing industry to make products.

What to look for: If metal inventory is high, it can be a tell-tale sign of business slowdown in the near future.  If mental inventory is low, it can be a sign of booming business.

What to do: When metal inventory is high, avoid stocks that are related to the manufacturing industry.  When inventory is low, buy manufacturing stocks.

Where to look: You can find this data at http://cmegroup.com or http://shfe.com.cn

15) Economic indicator: Personal savings rate

Type of indicator: Coincident

What it means: The personal savings rate is a measure of savings by consumers.  If consumers are saving more, it means they are more nervous about the economy and are cutting spending.  If they are saving less, they are a little more confident about their jobs and the economy in general.

What to look for: A increase or decrease in personal savings over a several month period.

What to do: If savings levels are high(er), avoid consumer-driven companies.  If savings levels are low(er), get into consumer-driven stocks.

Where to look: http://bea.gov/national/index.htm#personal 

16) Economic Indicator: Federal government budget deficits and the national debt

Type of indicator: Coincident and leading

What it means: Governments that are debt-burdened often resort to printing more money.  But if there is more money in the economy, it resorts to inflation.  So the government budget deficits and national debt is actually a telling sign of inflation.  When government debt is decreasing, it means the government’s incentive to cause decreasing.  The inverse is also true; if the government’s debt is increasing, it also means that the government’s incentive to cause inflation is also increasing.

What to look for: Increases or decreases in the national debt as a percentage of GDP, usually signaled by recurring deficits greater than 3% of national income.

What to do: If government debt (and therefore inflation) is increasing, short government bonds and buy gold and/or emerging market equity (mutual) funds.  If government debt is decreasing, buy government bonds and short gold.

Where to look: http://fms.treas.gov/mts/index.html

17) Economic indicator: Big Mac Index

Type of indicator: Leading

What it means: This is a fun index that measures what different currencies would be worth if a Big Mac burger cost the same in every country.  It is a way of measure purchasing power of many currencies—and a way to see whether a currency is undervalued or overvalued.  For instance, if a Big Mac cost $3.58 in the United States but only cost an equivalent of $1.83 in China and $6.87 in Norway, then it means that the Chinese currency is undervalued whereas the Norwegian currency is overvalued.  Some economists state that the Big Mac Index (BMI) is a better predictor of the value of a foreign currency than most complicated mathematical models.

What to look for: When using this investment strategy to invest, you want to predict the value of the foreign currencies over a long period.

Look for countries where Big Macs cost significantly less or more than the United States.

What to do: Buy undervalued currencies in the foreign exchange market or an ETF.  You can also short overvalued currencies through an ETF.

Where to look: It is published in The Economist every Friday

18) Economic indicator: Oil inventories

Type of indicator: Leading

What it means: If oil inventory is low, it means demand is high due to overall strenght of economy.  Inversely, if inventory is high, it means that demand is low, due to overall weakness in the economy.

What to look for: Increases or decreases in the oil inventory (not counting the government’s strategic reserves)

What to do: When oil inventory is low, move to riskier assets such as stocks.  When oil inventory is high, move money to safer assets.  In addition, when oil inventory is high, avoid stocks that are especially sensitive to fluctuations in the economy.

Where to look: http://eia.gov

19) Economic Indicator: Federal Funds Rate

Type of indicator: Leading

What it means: The federal funds rate is the rate at which banks borrow money.  This rate has a direct effect on the interest rates of many things, like adjustable rate mortgages, interest of savings accounts, credit card rates, etc.  When the cost of doing business are raised for the banks, the costs are passed directly to the customers in the form of higher borrowing rates for consumers.  The federal reserve use this rate as a mechanism to either control inflation or increase economic activity.

What to look for: You want to look for either an increase or a decrease in the federal funds rate.  An increase in the federal funds rate means that the Federal Reserve is trying to decrease economic activity for fear of inflation.  When the federal funds target rate is decreased, it means that the Federal Reserve is trying to increase economic activity amid a slowdown.

What to do: If there is an increase in the federal funds rate, you should consider selling your manufacturing stocks.  If there is a decrease in the federal funds rate, you should consider buying manufacturing stocks.

Where to look: http://clevelandfed.org/research/data/fedfunds/

20) Economic Indicator: Fertility rate

Type of indicator: Leading

What it means: Fertility rates drives the spending patterns of whole generations decades afterwards.  The idea is that people tend to follow a distinct pattern depending on their age.  People typically have kids and buy a house in their late 20s and early 30s in America.  And after the kids graduate college, the parents can once again save for retirement and start spending for themselves.  Of course each generation isn’t uniform in size—the baby boomer generation is vastly larger than any generation after.  In essence, the fertility rate shows the future changes in aggregate demand and the demand for specific goods and services, such as higher education and health care.

What to look for: Look for changes in fertility rates over several years.  In addition also look at demographic information.

What to do: Buy health care stocks while the baby boomers age.  Buy higher education stocks when small increases in fertility rates are due to enter college.  For example, fertility rate in 1991 was higher than it had been in the several years prior.  Thus, it would have been ideal to buy higher education stocks in 2009, when those born that year go to college.

Where to look: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2054rank.html

Go to page 1, 3