No matter how boring it sounds, all investors must make it a point to track economic indicators to understand the direction in which the nation is headed…[and, in the process,] sharpen [their] investment decisions. Here are the key indicators that you should be tracking:
1. Indicator: Government Spending; Type: Leading
Governments spend money on consumption, investment, and transfer payments so that benefits are created for people. For example,
- direct payments to people in times of economic calamities,
- scientific research,
Investors should analyze the government’s expenditure to understand its focus and apply the knowledge to their investment strategy. For example:
- a higher budget allocation to clean energy can build momentum in green power ETFs and stocks,
- a lower outlay for health insurance can impact the insurance industry, and so on…
2. Indicator: Employment (including self-employment); Type: Leading & Lagging
Analyzing the employment scenario helps investors understand the level of activity in the economy...
- weekly unemployment claims are lagging indicators and
- the total number of unemployed people are also lagging indicators, while
- the number of jobs available is a leading indicator.
To understand the unemployment situation, investors must analyze a universe that includes:
- The total number of the employable workforce,
- Percentage unemployed (data collected by weekly unemployment claims and monthly employment report)
- Job openings…
- indicates the economy is in trouble and spending on discretionary items will…[become less],
- impacts other sectors such as housing, business and consumer services, etc. and if the situation stagnates or worsens, it
- can impact productivity, personal income, and the general mood of the nation.
3. Indicator: Consumer Price Index Type: Lagging
…Our current rate of inflation (0.6% as of June 2020 [see table in the original article] as compared to 0.1% year-over-year) is low and it’s a signal of economic problems:
- we already are struggling with a high unemployment rate and low consumer confidence,
- the COVID-19 disruption has turned spenders to savers. Capital investments are on hold or shelved,
- the Fed has slashed interest rates to near zero percent and is aggressively buying bonds as well as lending in a bid to increase economic activity, but the virus is negating its efforts.
Conversely, a high rate of inflation:
- raises costs for businesses,
- makes companies less competitive,
- creates demand in the short run but deflates it in the long run, and
- reduces the real value of savings.
A moderate rate is the best, which is why the Fed is so desperate to boost the current inflation rate to 2%.
4. Indicator: Budget Deficit; Type: Leading
The U.S. government is currently busy printing money and spending more than it earns, which has crazily ballooned the budget deficit. Governments typically make money from taxes and spend it on programs that help people. However, when governments want to remain elected, they don’t give a damn and go on spending more than they earn, by printing cash.
The World Bank says that a country can get into financial trouble when its debt to gross domestic product ratio crosses 77%. It adds that each percentage point of debt above this threshold costs 0.017% of annual real growth.
- Our current national debt has crossed $26 trillion, and
- our GDP was $21.43 trillion in 2019.
Our debt is 121% of our GDP, which implies that
- we are living in a reckless financial environment…[and] that
- the deficit is costing us roughly 0.75% in annual real growth,
and the number is getting bigger…[given] the fact that COVID-19 will add to the government’s expenses and reduce its income some more. [One graph and one table are presented in the original article.]
5. Indicator: Interest Rates Type: Leading
When interest rates go low, people switch over to riskier assets to get more bang for their buck and the reverse happens when interest rates shoot up.
- The current rates are near zero percent and the Fed is buying bonds, driving down their yields leaving only risk assets like stocks, ETFs, precious metals, and cryptocurrencies on the table for investors to dabble in. This is exactly what’s happening these days, and it may get worse.
Instead of a general conclusion, let us apply what we have learned to the real-world situation and the stock markets:
- Government revenues are plunging and expenses are rising because of the COVID-19 disruption. Stimulus-2 is about to be announced, which will further pressurize finances.
- Roughly 26.6 million people, or about 15% of the employable workforce, are looking for jobs. The Fed expects the employment situation to stabilize in 2022, so, we are in for the long haul.
- Our rate of inflation is very low and if this rate hangs around for a long time, our economy will weaken further.
- Our budget deficit is booming and we have comfortably crossed the Word Bank’s danger zone. Our real growth will keep suffering so long the deficit keeps increasing.
- Interest rates are near zero percent, which is why stock markets are booming but the rise in indices is triggered by the rise in a few heavyweights…The low-interest rates are also responsible for the rise of prices in gold and silver and the dollar’s fall.
The state of the economy is such that the poor, low- and middle-income groups are finding the going tough, while the rich are getting richer.
From the above, it is clear that the markets and the economy are moving in opposite directions, and something will give sooner than later and restore the balance.
(A note from the author: It’s important to pay attention to the right market data, analysis, and insights on a daily basis…[because] when you stay informed on key signals and indicators, you’ll take control of your financial future. My award-winning market research gives you everything you need to know each day, so you can be ready to act when it matters most so click here to gain access and try the Lead-Lag Report FREE for 14 days.)
Editor’s Note: The original article by Michael A. Gayed has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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