There are many economic indicators available – more than the average investor has time to study or follow. But you ignore the economy at your peril.
Rather than ignore the economy or spend all your time trying to track or forecast it, pick a few meaningful indicators and follow them.
I track the following indicators and areas of interest:
One Friday each month, the Bureau of Labor Statistics (BLS) publishes the Employment Situation report. This report probably has more market impact than any other economic indicator. Using survey data, it details the increase or decrease in non-farm employment in the U.S.
There is also an employment report available using the payroll data of ADP – a company that handles the payroll for about 1 in every 6 people employed in the U.S. It correlates well with the BLS report and is based on actual data not survey data. Most interesting of all, the ADP National Employment report is published 2 days prior to the BLS report.
Further insight into the current U.S. employment situation from the U.S. Department of Labor is available in the Weekly Claims for Unemployment Insurance Report. As the name suggests, it is published weekly.
Considered the most accurate of all indicators for forecasting the direction of the economy, the yield curve is the relationship formed by the yield for each of the U.S. Treasury Bond maturities.
The bond with the shortest maturity normally has the lowest yield. For example, the yield for 3 month Treasury Bonds is lower than the yield for the next longer term bond, which is lower than the yield for the next longer bond, and so on. The normal yield difference between the shortest and longest maturity is about 2.5 percent
On occasion, things are not normal and the yields for shorter-term bonds are higher than the yields for higher term bonds. This is an inverted yield curve.
All six of the U.S. recessions since 1960 have been preceded by an inverted yield curve within 12 months. Twice, the yield curve inverted without a subsequent recession – once in the 60s and in 2005.
The current thinking is that both the magnitude and duration of the yield are important. Notice that the curve was inverted for much of 2006. Notice that a recession followed.
The simplest place to see the yield curve as it changes over time
Lets suppose you are not an economist by profession and don’t like poring over mountains of data to derive an economic forecast. There is an alternative.
The experts at The Conference Board (a private research firm in New York City) analyze 10 leading economic indicators to create an index. Published monthly 3 weeks after the end of the month, the index attempts to forecast what might happen in the economy 6 to 9 months in the future. It tends to be better at predicting a recovery than a recession.
You can view the data and analysis used to create the Index. In addition to educational information on how to interpret the index, you can learn how the index is calculated.
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