The Retirement Corporation of America

Tracking The Economy—Lesson #2

SO YOU DON'T have to be an economic wizard to figure out whether we're heading toward boom or bust or something in between. Track the leading economic indicators, and you'll be okay. Track just the S&P 500, and you'll still have a better idea than most people what state of health the economy will be in three to six months from today.

You'll have a pretty good inkling about whether it's time to take some chances--start a new business or increase the share of your retirement assets in stocks. Or, you'll have good reason to believe that the best stance for today is caution--trying to build your career where you work now and keeping more retirement wealth in bonds and cash because the outlook looks just a little cloudy.

Still, the more you know about the economic outlook, the more accurate your planning is likely to be. At the very least, being able to forecast the economy with a pretty good degree of accuracy will add to your self-confidence. Knowledge really is power. The more you know and understand about the economy, the more faith you will have in your own judgment when it comes to making plans for your financial future and making those plans come to life.

So, let's move just a little deeper into reading the economy. Let's learn about more of the important economic reports that will help give you the all-important self-confidence that comes with a sense of mastery over any subject.

The Dozen Economic Reports You Should Know About

There are numerous economic reports published each month. True, some of them are of value only to a very few. You probably don't want to know what is the latest estimate from the Agriculture Department about the size of this year's cotton crop. But some of the reports are so important to your growing knowledge of how the economy works, that you should know about them. So here are The Dozen Economic Reports That Really Matter:

Report #1: Employment. This report covers the number of people with jobs and the percentage of people who want to work but can't find jobs. The unemployment rate is interesting, but what's more crucial in terms of the future is the number of new jobs created during the month. After all, more people working means more people spending money in the economy--and it's that spending that makes the economy hum. This report also tells you the average hours worked per week by those with jobs. That's very important in terms of forecasting the economic future. The first step in a growing economy is having existing workers work longer hours. Only later do employers start to hire more workers. A jump in hours worked per week is very positive. A decline is negative. (This is published monthly by the Labor Department.)

Report #2: Personal income and personal spending. This report covers how much Americans earn each month--from our jobs, investments and savings--and how much we spend. It gets back to the idea that it is individuals, just like you, that really move the economy. Growing personal income is a sign of a growing economy. Since money burns holes in our pockets, we tend to spend most of what we earn. As long as personal income keeps rising, spending will also keep rising and nothing bad will happen to the economy. A slowdown in the growth of personal income--or an outright decline--is a worrisome sign. Even more worrisome is when personal spending exceeds personal income. That means we're dipping into savings trying to buy all the things we want to. That can't last for long and often means a recession is dead ahead. (This is published monthly by the Commerce Department.)

Report #3: Retail sales. This report covers how much we spend in retail stores each month. Since consumers spend two of every three dollars spent in the economy, a gain in retail sales is positive for the economic outlook. A decline would be negative. (This is published monthly by the Commerce Department.)

Report #4: Housing starts and building permits. This report covers the number of new homes started each month and the number of permits granted to build new homes in the future. Housing represents the biggest single expense for most of us--and homebuilding fuels a lot of growth in the economy. The more homes that get started each month, the more wealth that is generated to keep the economy humming. The more permits that are granted to build new homes in the future, the more that flow of wealth into the economy will continue. (This is published monthly by the Commerce Department.)

Report #5: Durable goods orders. This report covers new orders placed with factories to build products that will last for at least three years--like cars and computers. Nothing happens until someone places an order. Only then will factories turn on the machines and hire new workers to fill those orders. Growth in new orders signals a stronger economy ahead. A slump in new orders is obviously a bad thing. (This is published monthly by the Commerce Department.)

Report #6: Industrial production. This report covers everything produced by our factories, mines and utilities--from new cars to electric power. The more we produce, the better for the economic outlook. When production slows, the outlook turns bleak. (This is published monthly by the Federal Reserve.)

Report #7: International trade. This report covers how much of what Americans produce and grow is sold to foreign buyers and how much we buy from foreign producers. Add foreign purchases of American-made products to what Americans buy, and that obviously is a big plus for the U.S. economy. When we buy from foreign producers, instead of buying American, that's a negative for the economy. The ideal for our economy is a "trade surplus"--meaning we sell more to foreigners than they sell to us. Since we spend a fortune each year on everything from Japanese cars to French wine, we never run a trade surplus. The best we can hope for is as small a "trade deficit" as possible. (This is published monthly by the Commerce Department.)

Report #8: Producer prices. This report covers prices at wholesale--prices for raw materials and for products sold by manufacturers to retailers. As a consumer, you don't pay producer prices. But you study them because what wholesalers are paying today, you will pay tomorrow. A jump in producer prices now can mean that the prices you pay will go up in another month or two. Rising producer prices can warn of inflation ahead. Flat or lower producer prices mean the inflation danger is nil. (This is published monthly by the Labor Department.)

Report #9: Consumer prices. This report covers the prices you pay for everything that you buy--cars and cookies, doughnuts and doctor bills. Rising consumer prices mean inflation is a growing danger. Flat to lower prices mean that inflation isn't a concern. (This is published monthly by the Labor Department.)

Report #10: Institute for Supply Management report on business. This report comes from the people who do the buying for American business. It covers everything from the volume of new orders these buyers are placing to the prices they must pay to buy what they need. The report includes a Purchasing Managers' Index which covers manufacturing activity in our economy. When the index goes above 50, the economy is growing. When it falls below 50, the economy is slumping. Rising prices for what the buyers are buying can warn of inflation ahead. (This is published monthly by the Institute for Supply Management.)

Report #11: Consumer confidence.
This report covers how confident American consumers are about the outlook for the economy and for jobs. It also covers how willing we are to spend our money in the months ahead. Rising consumer confidence is a strong plus for the economic outlook. So are rising buying plans. When confidence and/or buying plans diminish or decline, the outlook has turned dark. (This is published monthly by The Conference Board--that private economic think tank.)

Report #12: Gross domestic product.
As noted elsewhere, this one covers the waterfront--the whole U.S. economy. The ideal is for the economy to keep growing at between 3% and 4% a year. Slower than that and it's a sign we may be heading for recession. Faster than that and we could be heading for inflation. (This is published every three months by the Commerce Department).