3 Ways To Tell If The Economy Is Really Improving

If there’s one thing that can be said about the Age of the Internet, it’s that we have more access to data than ever before.  Basically, you can find a wealth of information on just about any subject with a simple click of the mouse.In fact, we’re so inundated with data, it can often be […]

If there’s one thing that can be said about the Age of the Internet, it’s that we have more access to data than ever before.  Basically, you can find a wealth of information on just about any subject with a simple click of the mouse.In fact, we’re so inundated with data, it can often be overwhelming.  How do you know what information to use and what to ignore?The problem is particularly acute in regard to economic data.  Economics has always been an information-driven field.  And these days, there’s so much economic news, data, and analysis to sort through, it’s almost impossible to keep up.  Generally, people turn to their go-to news source for the latest economic news and analysis.  Unfortunately, it’s hard to find economics news on-air or online without getting a fair share of opinion.Nevertheless, understanding the economy is vital to any business.  It’ not just about knowing what’s going on now – you also have to plan for the future.  No company (or person) wants to be left flat-footed when the economy improves or worsens unexpectedly.Here’s the thing – several of the most commonly discussed, “mainstream” economic indicators aren’t as valuable as the media would have you believe.  In other words, the type of analysis you normally find on TV or on your favorite financial website may not be all that valuable.

Most Common Examples

Interest Rates – Yes, normally interest rates are extremely important to economic growth.  However, in our current ultra-low rate environment, interest rates can be effectively ignored.  In fact, we have a ways to go before interest rates will matter again in terms of meaningful economic forecasting.

Unemployment – Of course unemployment is important!  However, the headline unemployment number leaves out several important factors, such as potential workers who have given up on finding a job or those under-employed.  It many ways, the unemployment number we most often see misses the mark entirely.

US Dollar – Currencies are highly complex things.  The strength or weakness of a currency has everything to do with what other currencies around the world are doing.  Moreover, a strong dollar can be as damaging to some companies as it can be helpful to others.  There’s really no way to tell how an economy is doing by just looking at the current value of the dollar. That being said, let’s look at three ways to better understand how the economy is really doing:

  1. Consumer spending – Roughly 70% of US GDP is based on retail spending.   That’s not a misprint.  It’s not the big companies building factories or even the government purchasing airplanes that makes the economy tick.  It’s you and I going to the grocery store, buying clothes for our kids, or filling our cars with gas.  When you see retail spending improving (and particularly on bigger ticket items, like cars) it’s often a sign of confidence in an improving economy.
  2. Wage growth – As I said earlier, unemployment can be misleading.  However, wage growth is not.  Companies aren’t in a hurry to give raises in a poor economic environment.  But when times are good, companies want to keep their employees happy (and don’t want to risk high turnover).  As such, wage growth is an excellent sign that businesses believe the economy is in good shape.
  3. Price of copper – Shifting gears a bit, there are also strong predictive signals to be found in the commodities market.  Sure, you’ll hear about oil or gold prices regularly, but it’s actually base metals – especially copper – which provide more meaningful readings on future economic growth.  You see, copper is used in wiring, cable, electronic devices, motors, building materials, and much more.  Producers will typically start buying copper supplies before the economy is running on all cylinders, which makes the price of copper an excellent forward looking indicator.This is just a small cross-section of useful economic data.  Just remember, you owe it to your business (and yourself) to have a solid understanding of economics and what may be coming for the economy.