Stocks Training – Measuring Economic Health

Again, if you are going to be playing the game, it is good to know the variables you need to keep your eyes on. With a solid foundational understanding of how to measure economic health, you can make sure you make money on fundamentals when everyone else is in a panic.

As Warren Buffet once said, “As a group, lemmings have a rotten image, but no individual lemming has ever received bad press”. Learn how to measure the market pulse yourself and you can make decisions on  your own knowledge – not that of the ’stock tip’ or because of market frenzy.

Every month an index of leading economic indicators is released. When three consecutive rises in the index occur, it is a sign that the economy is growing. Similarly, three drops are a sign of a shrinking economy. The index is meant to help predict short term economic conditions.

There are four primary economic indicators that you should pay attention to:

1. Unemployment Data (Jobless Claims)
When unemployment is increasing, it is a sign that the economy is shrinking and a secondary risk is deflation. However, when unemployment decreases, it is a sign of a growing economy which puts the economy at risk of inflation if unemployment becomes very low.

2. Durable Goods
When durable goods increase, it is a positive sign. When they decrease, it is a negative sign. Essentially, the durable goods indicator identifies new orders received by manufacturers of durable goods.

3. Housing Starts
This is a big indicator as a growing economy typically creates demand for new housing starts.

4. New Factory Orders
A rise in new factory orders is a sign of a growing economy and confidence in the economy.
The overall index has successful predicted all of the recessions since 1950, however, it has also ‘predicted’ recessions that never occurred.

Along with following the index, we also suggest that you also learn how to measure consumer confidence. This should be easy as there is an index for this as well and four primary indicators to pay attention to.

The index in this case is actually a study compiled by the University of Michigan, the Conference Board, and Sindlinger & Co. that polls consumers over a period of time. The report looks at whether consumers are confident enough in the economy to take on debt, consumer confidence in job security, consumer income, and the consumer sense of business conditions.

Here are the four primary economic indicators to pay attention for measuring consumer confidence:

1. Weekly Earnings
This is issues on a monthly basis by the Labor Deparment and looks at individual income as consumer spending is the largest factor in economic growth.

2. Unemployment Rate
The lower the unemployment rate the more confidence consumers tend to have in the economy.

3. Producer Prices
Because producer prices end up being passed on to consumers, higher prices will likely materialize into lower consumer confidence and spending.

4. Consumer Credit
When consumers use more credit, it is a sign that they feel confident about buying.