We all know that timing the market is pretty well impossible, but you can watch certain economic indicators to get clues as to what is happening in the economy.  This in turn helps us make smarter investment decisions.

A (Very) Brief Economy Lesson

The economy moves in cycles.  If I drew a diagram it would look like a roller coaster with troughs at the bottom and peaks at the top of each loop.  Like a roller coaster there can be gradual changes, or steep climbs and stomach-churning drops.  Going from trough to peak is called expansion and from peak to trough is a contraction.

Key Economic Indicators

How do you know where we are in the economic (or business) cycle?  There are entire courses and books on economics (and most economists never agree with each other), but there are some clues that are readily available to the general public in the economic section of any major newspaper or financial website.  These are called indicators.  There are three main types of economic indicators:

  • Lagging indicators change after the economy has already begun to follow a particular cycle.
  • Leading indicators show what is going to potentially happen in the future.
  • Coincident indicators show what is happening in the economy right now.

Some Indicators You Should Watch

  1. Unemployment figures are lagging indicators so they might confirm that the cycle is in fact rising or falling.  Track reports that give the number of people on the unemployment rolls.
  2. Consumer confidence is a leading indicator as it refers to how consumers feel about the future of the economy.  If consumer confidence is high, they are much more likely to spend which translates into higher profits for companies which can lead to higher stock prices.  Of course, if confidence is low it means consumers are going to be saving their money instead of spending it.
  3. Retail sales is a coincident indicator, which gives clues as to how the consumer is actually behaving.  The first industry to recover after a contraction if frequently retail.  Then the demand for goods pushes businesses to produce more products, which often leads to a spike in manufacturing and materials.
  4. Real estate and new housing starts figures are a leading indicator of economic activity.  Individuals will make big-ticket purchases when they feel their jobs are secure and that they will be able to keep up with their mortgage payments.

There are many other indicators you can track including manufacturing and industrial trends, and inflation.  It’s important to monitor a number of different indicators before you change investment strategies to see if they signal the same thing.

Don’t worry about being too precise with the timing.  Each phase will last some time and you’ll have ample opportunity to read the signs and take appropriate measures.

With the current global economic crisis there is a lot of talk about a coming recession to equal that in 2008.  However, recent data on consumer confidence, retail spending and employment figures are trending upwards.

Do we look for good opportunities to buy, or keep our money in a savings account while we wait and see what happens next?  What do you think?

Print Friendly, PDF & Email

5 Comments

  1. MD on August 11, 2011 at 1:22 am

    You’re bringing back horrible memories from my 8am ECON class lol!

    I’ve heard so much different information on this current economic situation that I feel like my head will explode.

    I got a majority of my savings in a basic savings account. I still have a good chunk of change in my condo which I’ll be renting out soon so that I’m more flexible.

    • You and me both on August 30, 2011 at 11:40 am

      TO the guy who said his head is about to exploid, “you and me both”. I am writing my final for Macroecon and I am feeling the same way! I will be so glad when I am done, but knowing all that I do know, this information wont be leaving my thoughts for a long, long time!

      Best wishes with class!
      Terrie

  2. My University Money on August 11, 2011 at 9:58 am

    So Boomer, to build on what MD is saying, in your professional opinion, what sort of cycle are we in? I realize that there are “cycles-within-cycles” but are we in for a Japan-style sideways economic growth pattern driven by de-leveraging and the watering down of the USD? Or is this basically a graden-variety recession that was simply exacerbated by too much leverage and consequently will take us a couple years longer to get out of.

  3. Boomer on August 11, 2011 at 5:06 pm

    @MD
    Sorry about bringing back memories. My Econ classes were a nightmare (and there wasn’t as much to learn 🙂 ).

    @My University Money
    I don’t pretend to be any kind of expert but my opinion in that we in Canada are in an expansion phase. The downgrading of the US debt has panicked the rest of the world but out of habit they rush to the US$ when there own economies start failing which depresses our own dollar. Overall, I think Canada has a strong economy which will be somewhat affected by the US, but with some good economic policies we should be able to withstand most of it.

    Probably someone out there will rip me to shreds, but I’m not really worried about my investments, I’m always on the lookout for good buys and I have no debt. I can sleep at night.

  4. KnowMoney.ca on August 13, 2011 at 5:19 pm

    I cannot thank you enough for this blog post! This should be required reading for everyone!

    People are scared… they just don’t understand what is going on in the economy. Too many make the mistake of listening to the so-called “financial pundits”, who are spouting gloom-and-doom, as it makes for more sensational headlines.

    In a time where people are running scared, it’s great to hear a sensible voice helping to make sense of what it all really means. Thank you, thank you, thank you… and keep up the excellent work!

Leave a Comment