While we can never be absolutely certain what lies right around the economic corner, that isn’t to say that investors are perpetually blind to the road that lies ahead. In fact, along with distinct economic cycles that have proven to be reliable barometers in the past, four key economic indicators can also be monitored to illuminate economic trends that might ultimately impact your investments.
Although considered a lagging indicator – one where the supporting data trails real time economic factors by at least a fiscal quarter – looking for trends in unemployment can be very useful in determining which direction the economy might be going. With a historical base rate between 4.3 and 5%, movement either towards or away from that base rate is often indicative of an expanding or contracting economy. Generally speaking, expanding economies include rising productivity rates that are helpful to corporate earnings and, thus, your equity investments.
Another indicator often used to determine the overall direction the economy might be heading, real income works in conjunction with inflation to measure your income against the prices of goods and services across a broad spectrum of the economy. While rising inflation is typically associated with an expanding economy and rising productivity, it also has a negative impact on the purchasing power of your money and, therefore, your real income and wealth. Your money simply doesn’t go as far as it would under other circumstances.
Simply put, industrial production measures the gross output of our economy. It is measured in real time and gauges the overall productivity of the economy. Rising production rates are usually helpful to your investments since they directly correlate with higher corporate earnings and – at least ideally – profitability as well.
Although closely related to production figures, retail sales are also emblematic of consumer confidence. When consumers have a generally positive outlook on the direction the economy might be heading at any given time, they are more willing to spend their money due to that underlying confidence. Like industrial production, retail sales are closely associated with rising corporate earnings and profits and, therefore, can be very beneficial to your investment portfolio.
Although no investor or even economist has a crystal ball, collectively, these four key economic indicators can provide significant insights into the overall health of the economy and isolate any economic trends. Investments don’t always track alongside the economy but, over the long term, you are likely to find a symbiotic relationship between the economy and your investment portfolio.
Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.