| You
have probably heard these headline grabbing terms many times,
but did you ever wonder what they really mean??
Even in the investment community, there is much debate about which
indicators are relevant. Some experts pay the indicators little
heed, while other analysts watch them carefully. Some experts
clain that certain indicators are more important at some
periods in the economic cycle and less important at other times.
Despite the debate, economic indicates can impact your investment
decisions, including your real estate holdings, so it’s
worthwhile to take a close look at a few of the most widely
discussed.
Consumer Price Index
You may have heard an older relative recalling the days when a
pair of jeans cost only $5 and gallon of milk was just a dime.
In addition to reminiscing about their youth, they were also commenting
on the economy from a consumer’s perspective. The Consumer
Price Index (CPI) examines the economy in much the same way—by
measuring the price changes of items you use on a daily basis.
The CPI measures the monthly change in prices for a fixed “market
basket” of goods and services. These goods and services
fall into one of eight major groups: food and beverages (milk,
coffee, chicken, restaurant meals); transportation (cars, air
fares, insurance); medical care; apparel; recreation (cable TV,
pets, sports equipment); housing (rent, owners’ equivalent
of rent, fuel, furniture); education and communication (college
tuition, postage); and other goods and services (haircuts, funeral
expenses). |
|
Who
releases it?? The U.S. Department of Labor’s Bureau of Labor
Statistics releases the CPI every month. The Bureau reports how
much the market basket of goods and services costs each month, and
compares this price with the price of the same goods and services
in a prior period.
The bottom line?? Since the CPI provides the best inflation reading,
the Fed uses it as a guide in setting monetary policy.
Economists look to the CPI for a read on inflation, but they’re
aware of its limitations. Seasonal factors can cause extreme price
fluctuations in food and energy. Many people focus on the “core”
CPI which excludes these cyclical components. CPI can track price
changes, but it does not accurately reflect changes in quality.
For example a new medical procedure may cost more
than the old one, but it might also have a higher success rate.
Experts watch the index as inflation affects bond yields and the
cost of living, both of which impact economic growth. Wage
increases don’t always keep pace with inflation. If inflation
rises quickly, interest rates can rise sharply. Both of these can
slow the
economy.
Gross Domestic Product
I have heard on TV news commentators mention gross domestic product
or GDP, when they are talking about how the economy is doing. The
number has a big impact on political campaigns and elections, and
the federal reserve uses it when adjusting its monetary policy.
|
|
GDP
measures the value of all goods and services produced in the United
States and covers every major sector of the economy. It includes
consumer spending on goods and services, business investment in
equipment and inventories, exports, imports, and government spending
on everything
from the military to local budgets.
Who releases it??
The U.S. Department of Commerce’s Bureau of Economic Analysis
releases it in three phases. The advance estimate is reported
late in the first month after the end of the calendar quarter.
Two later revisions, the preliminary and the final reports, are
released over the following 2 months.
The bottom line?? With so much focus on the GDP, you would think
that it is the KEY to economic forecasting. But because of the
delay in reporting with the late release and revised numbers,
it is less revealing than other indicators.
Current Employment Statistics
People who loose their jobs are most likely to rethink their budgets,
finding big ticket items like a plasma screen TV may be less appealing.
Employment figures garner lots of media attention, and with good
reason—these figures affect millions of people in the labor
force.
Continued |
