Market Insights

Understanding Economic Indicators for Investment Strategy

From CPI to GDP, here’s the lowdown on what some of the most important economic indicators mean and why they matter.

Employment is growing, and the Consumer Price Index is down. What about housing starts? Or the gross domestic product?

Investors are barraged with economic data. If you’re like many investors, you may wonder what the indicators mean and how they all fit together. Here’s a look at several of the most important economic signposts.  

Gross Domestic Product (GDP)

GDP measures the output of goods and services across many industries, providing the broadest barometer of the country’s economic health. “The economy is made up of lots of different sectors, and GDP adds everything up,” says Ira A. Silver, associate professor of managerial economics at Texas Christian University’s Neeley School of Business. “It’s not a perfect indicator, but it’s indicative of the overall health of the economy.”

While most indicators are released monthly, the Bureau of Economic Analysis updates the GDP quarterly. 

Employment Situation Summary

The Bureau of Labor Statistics’ Employment Situation Summary includes the number of jobs created and the unemployment rate each month. In February 2013, for example, total employment increased by nearly a quarter million jobs, compared to average job growth of 195,000 in the previous three months. Because these statistics tend to be relatively volatile, most investment advisors caution against making trading decisions based on any single month’s numbers.

Employment statistics can help illuminate trends in the job market, but they don’t tell the whole story. For example, the unemployment figure doesn’t include people who have stopped searching for a job.

Consumer Price Index (CPI)

The Bureau of Labor Statistics also maintains the CPI, a monthly measure of changes in the price of consumer goods and services. The CPI is adjusted to remove the influence of seasonal factors. Still, Silver cautions that volatile food or energy prices can throw off the readings in a given month.

Temporary and seasonal factors can distort some parts of the CPI more than others. Energy prices are a good example. “When the weather starts getting nice, or if a hurricane threatens the oil refineries in the Gulf of Mexico, gasoline prices will go up,” he says. “But then the temporary factor passes and they go down again.” For this reason economists often focus on Core CPI, which strips out food and energy costs, to draw a picture of inflation trends.

Housing starts

Each month the U.S. Department of Housing and Urban Development releases data on housing starts: the number of privately owned new houses on which construction has started. This statistic has shown a strong rebound over the past year.

The housing industry creates many jobs, making housing starts a bellwether for the economy—especially these days, as the real estate market climbs out of a five-year funk. “So much goes into a house—glass, electricity, furniture window coverings, rugs—that new home construction has a major impact on the economy,” says Silver.

As you watch economic indicators, focus on the long term. “It’s important not to tie your expectations to any one month of any one indicator,” says Silver. “You want to look at a wide range of indicators over several months to see if there’s a trend.”

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