2012-04-05 / Features

Getting To Know The Economy

By Wells Fargo Advisors

Prudent investing takes more than detailed knowledge about different type of investment strategies. It also requires a clear understanding of the economy and how it works. Following are descriptions of some of the more important economic reports that we believe every investor should know about:

Gross Domestic Product (GDP): Provided quarterly by the Bureau of Economic Analysis, GDP offers the proverbial “big picture” on the U.S. economy. It measures the value of all goods and services produced in the United States during a calendar year minus exports, government spending and products made by U.S. companies in foreign markets.

When GDP increases, the economy is said to be growing or expanding. when GDP declines, the economy is said to be slowing or decelerating. When GDP declines for two consecutive quarters, many economists consider the economy to be in recession.

Consumer Confidence Index: This index gives a good sense of how Americans feel about the current economic environment and about their future expectations. The index is published monthly by the consumer Research Center of the Conference Board and is based on a representative sample of 5,000 U.S. households.

When people are positive about the economy, the index tends to go up. When they are pessimistic, it tends to decline. A rise or decline in the Consumer Confidence Index can have a major effect on the way Americans spend money .This can impact the economy at large since consumers make up about two-thirds of U.S. economic activity.

Employment Cost Index: This index is used to monitor inflation by measuring changes in labor costs for money wages and salaries. It also measures non- cash fringe benefits in non-farm private industry and in state and local government. It is provided quarterly by the Bureau of Labor Statistics.

Index of Leading Economic Indicators (LEI or ILEI): The Conference Board provides this index every quarter. It consist of 11 economic reports, such as initial unemployment claims, stock market activity, building permits, new orders for consumer goods, plant and equipment orders and sensitive material prices.

Since the LEI consists of 11 economic reports, it is generally considered to be a helpful gauge of future economic activity. In fact, three consecutive increases in the LEI suggest that the economy may have begun a longerterm expansion.

Industrial Production: This index, provided each month by the U.S. Federal Reserve, offers an informed view on how key industries ar faring. Specifically, it shows the change in output for three sectors: manufacturing, mining and the gas- and electric-utility industries.

Consumer Price Index (CPI): This index tells you whether prices are rising or falling. It’s published each month by the Bureau of labor Statistics. The CPI tracks the price changes for a fixed basket of goods and services, from bread and milk to cars and energy.

Rising inflation is negative for the economy because consumers must spend more money to buy the same basket of goods and services. A decline in inflation is generally positive because consumers can spend less to buy the same basket of goods and services, leaving them more disposable income to help prop up the economy. However, negative inflation, or deflation, is unfavorable, because both people and businesses minimize spending in hopes of getting the same goods and services at lower prices later.

Unemployment Rate and First-Time Jobless Claims: The unemployment rate is the percentage of American workers who are out of work. “First-time jobless claims” is the number of people filing for unemployment benefits for the first time. These important indicators are provided by the Department of Labor.

When unemployment rises, fewer people are working and, therefore, fewer consumers are spending money – a negative for the economy. When the job market shows strength, more people are working and more consumers are spending money, which indicates economic growth.

A final word

All of these economic indicators can affect the stock and bond markets, but other factors also move prices: short- and long-term interest rates, corporate earnings and earnings guidance from chief executives, geopolitical events and general investor sentiment.

Your financial advisor can help you understand the potential impact of these and other economic indicators on your investment portfolio.

This article was written by Wells Fargo Advisors and provided courtesy of Todd Alexander, The Alexander Financial Group, in Mc- Connellsburg.

Investment-products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFFN), and Member SIPC. The Alexander Financial Group is a separate entity from WFAFN.

Return to top