Thursday, May 28, 2009

Economic Indicators

The Series 65 will almost certainly ask 2 or 3 questions about economic indicators. You'll need to memorize which are leading, which are coincident, and which are considered lagging indicators. And, you'll need to recognize the significance of rising claims for unemployment insurance, increased or decreased inventories, etc. Remember that a leading indicator shows up before it plays out in the economy, including: # of new claims for unemployment insurance, # of manufacturing workers, and the stock market. Coincident indicators indicate where the economy is right about now, including: GDP, CPI, personal income, unemployment rate, manufacturing and trade sales. Lagging indicators point backwards, including: inventory, duration of unemployment, and corporate profits.

This morning I see headlines that the number of initial claims for unemployment insurance dropped last week. Of course, millions of people will probably interpret that as good news and rush off to throw their hard-earned cash into "the market," but if you read more closely, you see that this so-called "good news" must be taken with a grain of salt. First, the number fell from 636,000 to 623,000, which is a lot of unemployed people and about twice as high as what we'd see in a healthy economy. Second, although the leading indicator--initial claims for unemployment--improved, the coincident indicator--unemployment rate--worsened. How bad is the unemployment rate? About 9%, with economists expecting it to hit 10% soon. There are approximately 6.78 million people receiving unemployment benefits now, which is the largest number ever recorded since they started keeping track in 1967, and is the 17th week in a row that we've set a record!

Hmm, what else does this economy have going for it?

The only "good news" I've seen lately is that consumer confidence is rising and that durable goods (washers & dryers, refrigerators, etc.) orders are rising. I would sure hate to miss out on the next bull market for stocks, but something tells me that party won't even get started until this time next year. Of course, as Warren and Charlie said in Omaha a few weeks ago, the economy will almost certainly be miserable for all of 2009 and most of 2010 . . . but that doesn't mean they can predict where the stock market will be over the next year or so. They don't try to time the market or play the "top-down" game of looking at economic indicators and "determining" which companies will benefit from economic trends. They just buy good companies and hold them as long as possible.

Do some web research on economic indicators. is a good site for that.

No comments:

Post a Comment