Key economic indicators: Taking the economy’s temperature

You’ll often hear economists or journalists talking about the “health” of the economy, as if it were a person. It’s actually a fitting analogy — like a person, sometimes the economy is strong and healthy, while at other times it’s weak and not doing as well. The economy even gives us clues to its overall health, like symptoms of illness in a sick patient.

Recognizing these signs and symptoms isn’t always easy, but that’s where key economic indicators come in. These indicators take a measure of the economy’s health, helping you get a sense of where things are headed. Why is this important? If you’re an investor, or someone with a hands-on approach to saving for retirement, understanding key economic indicators can help you make more informed financial decisions, which could lead to better long-term results.

Top economic indicators and what they tell you

Here’s a list of some of the most commonly-referenced, key economic indicators and a little about what they tell you. They’re frequently mentioned in economic reports in the paper or on the evening news.

Unemployment insurance claims

The Unemployment Insurance Weekly Claims Report, issued by the U.S. Department of Labor, tracks job losses throughout the country. A persistent rise in these claims is one of the earliest signs of a faltering economy.

Consumer confidence

The Consumer Confidence Index (CCI) is considered one of the most accurate indicators of how consumers are feeling about the economy and their personal situation. When there are more jobs, better wages and lower interest rates, confidence and spending power rise. This can have a strong positive effect on stock prices.

Inflation

The Consumer Price Index (CPI) — also known as the cost-of-living index — is considered the most important indicator of inflation. As the costs of common goods and services rise, the CPI often follows, which means an increase in inflation. Often experts will talk about the economy “heating up,” and that leads to a rise in inflation as there is more demand for goods and services causing prices to rise. The Fed wants to keep inflation at a healthy level, and so they will often increase short-term rates in response to a higher CPI in an attempt to “cool down” the economy.

New Home Construction

Housing is a huge part of our economy, so measuring new construction of homes or apartments — also known as housing starts — provides an important clue to the health of the economy. Declining housing starts show a slowing economy, while increased housing starts can actually help lift an economy out of a downturn.

Gross Domestic Product (GDP)

Published quarterly by the U.S. Department of Commerce, the GDP is perhaps the greatest indicator of a country’s economic health. It represents the monetary value of all the goods and services produced by an economy, including consumption, government purchases, investments, and the trade balance. If the GDP fails to meet or beat market expectations, stock prices can decline — and vice versa.

How healthy is the economy, and how will it affect your investment strategies? Key economic indicators can give you the clues you need. Like a visit to the doctor’s office, they’ll alert you to the signs and symptoms of a changing economy — and help you decide how to react.