HOT TOPIC: Key Indicators Signal Progress for U.S. Economy
Data from government and private-sector reports can generate tantalizing headlines for the business media. And lately, nearly six years after the official end of the Great Recession, the good news is that Americans finally have reasons to feel upbeat about their financial prospects.
Economic indicators typically fall into one of three categories. Leading indicators are watched closely because they may forecast future economic trends and turning points. Coincident indicators move in step with the broader economy, providing insight on current conditions, while lagging indicators generally only confirm that a trend is occurring.
The following monthly reports are often used by executives, government officials, and investors to monitor the health of the U.S. economy and inform public policy and business decisions.
Employment Picture Brightening
The Employment Situation Report is released by the Bureau of Labor Statistics. Information collected from the “establishment survey” is used to estimate the number of jobs created or lost during the month and to track additional nonfarm payroll data. The current unemployment rate is calculated with data captured by the “household survey.” Payroll figures are considered a coincident indicator, but the unemployment rate is a lagging indicator, because business hiring or firing typically comes after a rise or fall in economic output.
More than a million jobs were created from November 2014 through January 2015 — the best three-month stretch since 1997.1 The unemployment rate has also improved from a post-recession peak of 10.0% in October 2009 to 5.7% in January 2015.2
Another survey offering more hope for job seekers showed that there were 5 million open positions at the end of December, the highest level since 2001.3
Consumers Ready to Shop
The Conference Board’s Consumer Confidence Survey sends out questionnaires to 5,000 households each month, asking them to rate current and expected business and employment conditions for their regions and to estimate their total family incomes for the next six months. The responses are calculated into a numeric score called the Consumer Confidence Index (CCI), which rises or falls depending on whether consumers feel better or worse about their current finances and prospects for the future.
Public surveys are subjective, which means the results are influenced by emotions and can sometimes contradict statistical data. Still, the average consumer’s willingness and ability to spend are critical factors, because household spending accounts for more than two-thirds of U.S. economic activity.4
During the fourth quarter of 2014, consumer spending grew at the fastest pace in more than eight years.5 And in January 2015, the CCI exceeded economists’ expectations and surged to its highest level since August 2007.6
Housing on the Rebound
The New Residential Construction Report, issued by the U.S. Census Bureau, includes detailed information about new housing starts and building permits. The National Association of Realtors releases a monthly Existing Home Sales Report that tracks market activity and prices for resales.
These housing market figures are considered to be leading indicators. Home building tends to boost employment, and a healthy housing market often has positive effects on local businesses. People who buy homes often need appliances, furnishings, and other home goods and services. When market prices and home equity are rising, homeowners feel wealthier in general and may be more comfortable spending money on big-ticket items such as cars and vacations.
Housing starts peaked at an annual rate of 2.27 million in 2006, then crashed below 500,000 in 2009. More recently, housing starts improved 18.7% year-over-year to an annual rate of 1.065 million in January 2015.7 In addition, the national median existing-home price rose 5.8% in 2014 to $208,500, the highest since 2007.8
Investors often use economic data to assess current or future investment opportunities. Consequently, markets may rise when a report is encouraging (especially when the data is better than expected) or fall when a key statistic is viewed as disappointing.
Many factors have the potential to affect economic growth and the financial markets, for better or worse. Therefore, it may not be wise to read too much into any report, regardless of how newsworthy it seems.
All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.