If you have listened to the news for any amount of time during your adult life, you are sure to have heard financial experts discuss leading economic indicators and what they mean for the direction of the overall economy. I thought it would be interesting to take a deeper look at some of the most important economic indicators we follow over the next few months with the end goal of providing you a deeper understanding of what makes up the health of our economy overall. There are different categories of economic indicators: leading and lagging. Leading indicators can provide an idea of what may come in the future, while lagging indicators are used to confirm what is in progress.
The first leading economic indicator we’ll explore is Manufacturing Demand. While manufacturing has substantially declined as a share of the overall U.S. economy over the past few decades, it still provides important “on the ground” information. If manufacturing stalls, it has the potential to impact the health of related indicators such as unemployment and retail sales. On the other hand, a vibrant manufacturing base leads to more middle-class jobs, exports, rising productivity, research and development and innovation. Manufacturing is measured by five data points: new orders, shipments, unfilled orders, inventories and capital goods of both durable (expected life of three years or more) and nondurable goods (quickly replaced products such as food, clothing, medication, etc.). This data is collected by the U.S. Department of Commerce on a monthly basis via a voluntary survey and is based on approximately 5,000 reporting units, representing 3,100 companies.
The second economic indicator we’ll take a look at is Consumer Spending. Consumer spending is the amount of money a household spends on durable and nondurable goods, as well as services. There are several factors in consumer spending, but one of the main determinants is disposable income. As a consumer’s disposable income increases, typically so does consumption, driving up the demand for goods. Manufacturers then must ramp up production to increase the supply of goods, which means they create more jobs. This cycle is a key component of economic expansion. However, if demand increases, but supply does not, then the price of goods will increase. This in turn creates inflation which leads us to the second factor in consumer spending: prices and interest rates. Inflation impacts the prices of goods, which naturally impacts consumer spending. Once inflation increases to such a point that purchasing power is eroded, consumers are less likely to have disposable income after meeting basic living expenses. Low interest rates tend to spur spending on luxury and big ticket items. While high interest rates encourage saving. Lastly, consumer confidence is another important factor in consumer spending. When people are feeling generally positive about the overall condition of the larger economy and their own financial future, they are apt to spend more.
That’s all for this installment! Next time we’ll tackle Retail Sales and Inflation.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Rachel Tanksley and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse any of the individuals or organizations mentioned above. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Starks Financial Group is not a registered broker dealer and is independent of Raymond James Financial Services.