How economic indicators affect the small investor PERSONAL FINANCE

March 07, 1993|By William Sluis | William Sluis,Chicago Tribune

Making sense of the government's maze of monthly economic indicators is so challenging that many Americans simply tune them out.

Is the inflation arrow pointing up? Down? Sideways?

What about joblessness? Are more workers being hired, or are huge companies showing them the door?

For those on Wall Street who oversee enormous mountains of paper assets, a slight fluctuation in such statistics can mean fortunes gained, or lost.

For bond traders, millions of dollars can turn within 15 minutes after the release of a government report.

For the individual investor, too, keeping track of the numbers can affect where money is placed. When inflation worsens, financial assets can evaporate. Acting quickly can avoid losses.

Keeping track of the torrent of numbers can throw the small investor off track. Although it is easy to notice the major indicators, like the monthly unemployment and inflation reports, investors might overlook more telling statistics.

"The most important thing to watch, short term, is the direction of policy by the Federal Reserve," says Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, a Chicago investment firm. "To that end, every investor should watch the federal funds rate."

Many investors may not know where to find the federal funds rate. But that rate, which banks charge one another for overnight loans, is published daily in newspaper financial pages.

It is considered the benchmark for short-term lending, and it influences the cost of credit throughout the economy. In recent months, the funds rate has been near a 30-year low, around 3 percent. Any sharp move upward could trigger a sell-off in both stocks and bonds.

According to analysts at Robert W. Baird & Co., the Milwaukee-based brokerage house, the behavior of short-term rates last year -- staying flat at a low level for months -- "is exactly the pattern seen in the first recovery year in each cycle over the last three decades."

That also means, according to the Baird analysts, that 1993 will likely see a rise in short-term rates. If rates do move higher, protecting investments could suddenly become much more difficult than it has been over the last five years. It was rising interest rates, more than any other factor, that triggered the 1987 stock market crash.

The federal funds rate is an example of a usually stable government figure that, at any time, can swing wildly, setting off waves of selling in financial markets.

Mr. Wesbury, the Chicago economist, watches carefully any numbers that relate to the job market, Fed monetary policy, orders to manufacturers and auto purchases. Watching these numbers in the early days of every month helps suggest the direction of the economy, he says. The figures could set off alarm bells about inflation.

He warns that although it is important to use a microscopic approach to look at day-to-day reports, an investor should not overlook the broader picture.

His advice: Watch government policies, especially any move to add more taxes or regulations, which have negative long-term implications for stocks and bonds.

Here is a rundown on some indicators that are issued every month:

* Unemployment. This monthly figure measures joblessness and the the growth or decline of payrolls. It is regarded by some as the most important measure of the economy, because a rise in employment, for instance, translates into greater spending.

* Consumer price index. Any sharp and unexpected jump in this number could frighten financial markets about inflation, setting off selling of stocks and bonds.

* Consumer confidence. Based on a survey by the Conference Board, a New York research organization, this number measures the mood of consumers. A jump in the index is regarded as a sign of economic expansion.

* Housing starts, new-home sales and existing-home sales. These statistics measure the strength of the construction industry. An increase in home building boosts the rest of the economy.

* Leading economic indicators. This index measures 11 clues to the economy's health -- such items as consumer confidence, stock prices, filings for unemployment benefits and the length of the average workweek. Skeptics say it does not "lead" very well, because many economists know most of the numbers before the index is published. But the index does give an overall picture.

* Gross domestic product. Issued once every three months and revised in the subsequent two months, this figure measures how fast the economy is growing.

* Factory orders, durable-goods orders and industrial production. These describe how rapidly the nation's manufacturers are receiving orders and how fast factories are operating.

* Merchandise trade. This monthly number tells how quickly Americans are buying foreign goods, as well as the strength of U.S. exports.

* Retail sales. Tells how much Americans are buying, including the key component of auto sales.

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