We’re bombarded with economic news and data — but what does it all mean? Read this Q&A to find out.
Q&A on Economic Indicators
Q: What should people keep in mind when they hear such-and-such indicator is doing this or that?
The first thing to remember is context. When we hear, for instance, that U.S. unemployment is down to 6.6%, we need to evaluate that number relative to historical results and ideally dig further by finding out how much of the drop is due to part-time jobs, or a change in the labor force.
Context also means seeing how a particular indicator relates to a bunch of other indicators. This is hard – if not impossible — to do in a short radio or TV clip or even the Internet, which might provide more context but is often misleading or even inaccurate.
So most people come away with a number and direction, like “big drop” or “big rise.” But rarely does an indicator reading mean that much by itself. Only by looking at a variety of indicators over time can we start to discern patterns and trends, which is what macroeconomic forecasting is about.
Q: What’s the second thing people should keep in mind?
That there are actually three types of indicators: (1) leading; (2) lagging; and (3) and co-incident. Leading indicators tend to be more closely watched because they provide clues to future economic performance. Included here are things like producer prices, which tend to eventually affect consumer prices and inflation; or durable goods orders which clue us in to future production.
A lagging indicator, on the other hand, reflects the past. The most common lagging indicator is economic growth (the growth rate in GDP). By the time the report is finalized, it’s telling us about activity that happened three months ago. Although components of GDP can spill over into the next quarter, the information is often too dated to have much predictive value.
A co-incident indicator, such as the unemployment data, provides insight into the current situation.
Q: So how does LNWM come up with trends on which to base investment decisions?
If you regularly look at the wide variety of indicators in context, you start to discern trends. We then analyze the repercussions of those trends as they play themselves out – largely in context of fiscal and monetary policy. An understanding of the relative health of the economy provides some insight as to how the Fed might act, which could drive investment decisions.
Here at LNWM, we work hard to discern trends, consider the repercussions, and after a lot of analysis determine whether it’s appropriate to make changes to investments.
We are very careful with our analysis, because we realize macroeconomic projections can be wrong, especially the further out you go, due to the increasing likelihood of unexpected events.
This is why Harvard economist (and Presidential Medal of Freedom recipient) John Kenneth Galbraith joked: “The only function of economic forecasting is to make astrology look respectable.”
Q: What are some key indicators LNWM is watching especially closely now?
One is “Non-Residential Fixed Investment,” which is how much companies are investing in current or new operations, was barely back up to the levels of 2007. It’s not because companies don’t have the money.
In fact, U.S. corporations are sitting on a record amount of cash. That’s because they’ve dramatically cut costs by reducing their workforce, suspending capital investments, and lowering their financing costs by borrowing at very low interest rates. They’ve used some of their excess cash to buy back stock and pay dividends, but not enough to put a dent in those record-high cash holdings.
So many people are asking: what can get U.S. corporations to start investing that cash in earnest? Greater confidence regarding our economic future. Companies would invest that cash if they believed it could generate attractive returns.
Q: Any other indicator of special interest?
The unemployment picture, and the lack in inflation-adjusted wage growth the past 10 years. Adjusted for inflation, Americans’ real incomes have fallen an estimated 8% since the start of 2000.
A high school education is no longer likely to get you into the U.S. middle class. And because of higher skills demanded in the workplace, people are staying in school longer or accepting low-skill/low-wage jobs to get by. There are structural trends affecting our employment situation that will take time to resolve.