The Retirement Corporation of America

Tracking The Economy—Lesson #1

YOU'RE NOT THE only one that cares deeply about what the economy is doing and what it is going to do next. Everyone with a job or a business or money in the bank or investments or any of the above wants to know everything they can about the economy.

For that reason, every last corner of the economy is measured and tracked and reported on just as often as the numbers can be put together.

Some statistics are generated by the government--by the Commerce Department, the Treasury Department, the Labor Department or the Federal Reserve.

Some statistics are put together by private entities--the Conference Board (which reports on such things as how confident we consumers are about the economic outlook) and the National Bureau of Economic Research (which keeps the historical records on the business cycle).

Other reports come from banks, brokerage houses, universities, trade associations, businesses, independent economists and more.

There is more information about the economy available than you could consume in a lifetime. Because the economy is so near and dear to the hearts of Americans, each major economic report is quickly made public via radio, television and newspapers. Thanks to the Internet, there is more information made available, more quickly, than ever before.

If you own mutual funds or stocks or belong to a 401(k) plan at work, you can be sure of receiving more news and analysis about the economy.

In other words, it's not a matter of how to find out what's going on with the economy, but of deciding which few reports about the economy really matter among the many that are published every year.

Of all these reports, here are the ones to pay most attention to. Again, you won't have to search for them. They will be widely reported when released. Open your newspaper or turn on your radio or TV or boot up the Internet and there they will be.

The Leading Economic Indicators

What if you could look at a single economic report and get a pretty good inkling of which way the economy is heading--expanding, contracting or just going sideways. Well, there is such a report called the Leading Economic Indicators. An index of the indicators is published monthly by a private economic think tank called The Conference Board. It isn't 100% accurate in forecasting the economy, but it doesn't do a bad job either. If you have only enough time and interest to pay attention to one report a month, this is the one. All things being equal, a change in the direction of the leading indicators gives you between three-and-six months' warning of impending change in the overall economy.

The idea is that things happen in the economy in a certain sequence--somewhat as follows:

1. New orders placed with factories slow and fewer new homes get built.
2. That causes businesses to cut back on overtime and eventually to start laying people off.
3. That causes consumers to turn pessimistic and spend less.
4. With business slowing and consumer confidence down, the stock market begins to swoon.
5. When all of the above happens, it's pretty clear evidence the economy is heading into a recession.

Or, looked at from the other side:

1. New orders placed with factories pick up and more new homes get built.
2. That causes businesses to hire more workers and to schedule more overtime.
3. That causes consumers to turn optimistic and spend more.
4. With business picking up and consumer confidence gaining, the stock market begins to rally.
5. When all of the above happens, it's pretty clear evidence the economy is heading into an expansion.

The leading economic indicators consist of 11 different economic reports—each one picked because it measures something that happens early in the economic sequence. There are 11 leading indicators. Among them are:

•  Average hours worked per week by factory workers.

•  The number of people filing for unemployment each week.

•  New orders placed with factories.

•  Permits issued to build new houses.

•  A measurement of how consumers feel about the economic future.

•  The performance of the stock market as measured by the Standard & Poor's 500-stock index.

No single month's report means much. But if the leading indicators indicate a slowdown ahead for three months running, the odds favor a slowdown ahead. If the leading indicators indicate a speedup ahead for three months running, the odds favor a speedup ahead. The leading indicators aren't 100% accurate. Sometimes the economy heads off in a certain direction—only to veer away. But, if you just want to follow one set of numbers, the leading indicators is the one set of numbers to follow.

The Indicator to Use if You're Really Lazy

Well, maybe you're really busy or the whole idea of trying to keep tabs on the economy just overwhelms you. You'll get the hang of it in time—learning to track the economy with the best of them. For right now, you'd like to take it easy—just take a quick glance at the business section or a quick listen to the business news.

Okay, there is one indicator that does a pretty good job all by itself. That's the Standard & Poor's 500-stock average. It is one of the leading economic indicators—and for good reason. It represents the combined thinking of a number of very savvy people—investment professionals, mutual fund managers, international bankers and more—on where they see the economy heading.

And it does have a pretty good track record for calling turns in the economy. That's not so surprising, given that:

•  All the events that point to economic slowdown ahead tend to depress stock prices.

•  All the events that point to pickup ahead tend to lift stock prices.

If you only want to follow one leading indicator, follow the stock market and you'll have a better idea than most people where the economy is likely to be three to six months from now.