Quick context:
- There is so much data and so many indicators to gauge how the economy is doing
- But, the data has so much noise and many caveats (data isn't timely, flaws in how the data is collected & measured, not actionable to connect-the-dots on what I should be doing as an investor)
- I've had to deal with similar issues as a Finance Manager who needs to report to the C-Suite and investors on how we're doing with the business. We have so much data and the same problems with our data, but how do we use this data to make actionable & swift decisions?
- Using a similar philosophy, I identified 5 economic indicators that help me quickly & sufficiently gauge how the economy is doing and help me connect-the-dots on what I should be doing as an investor.
- This is what I found helpful, but love to see your comments on what economic indicators make you a better investor
1. Jobs Report
- Why: The North Star for me is that my companies should be delivering strong results if people are employed, making money, and spending their money on goods & services that my company provides. Low unemployment, strong job creation, and a tight labor market quickly signals to me my companies should continue to do well with a firm economy.
- What I look for: I'm very focused on the unemployment rate (3.6%), number of jobs created (+390K), and the labor force participation rate (62.3%). The labor market is strong which is great for my companies , but my longer-term outlook for unemployment (4.0% – 5.0%), job creation (+100K), and LFPR (~60%) is softer to align with demographic trends.
- Where: Employment Situation – 2022 M05 Results (bls.gov)
2. Jobless Claims
- Why: I really like to get a weekly Thursday update on how many people are filing for unemployment so I can get timely & high-frequency update on how the labor market is doing. A strong labor market is very important so my companies can sustain demand and deliver strong results.
- What I look for: The pre-COVID average is 218,000 claims so anything below or around this level means the labor market is strong and gives me an indicator that the monthly jobs report should be strong as well.
- Where: News Release (dol.gov) or find the unemployment insurance weekly claims report here News Releases | U.S. Department of Labor (dol.gov)
3. Materials released from the Federal Reserve like FOMC Projections, FOMC Minutes, FOMC Announcement, and Fed Chair Press Conference
- Why: They're professional economists, have more resources, and connections than I do to understand how the economy is doing & where it's going. I learn a lot from their expertise and try to make sure I'm on the same page on my understanding of the economy so I know where monetary policy and interest rates are going.
- What I look for: My favorite thing to look for is their FOMC projections since they share their forecasts for economic growth (~2%), unemployment rate (~4%), inflation (~2% in the long-term), and interest rates (another 175 bps by the end of the year).
- Where: The Fed – Meeting calendars and information (federalreserve.gov)
4. Inflation
- Why: The Federal Reserve looks at inflation to determine if interest rates should go up or down. If inflation is too high, the Federal Reserve will increase interest rates, tighten monetary policy, and will negatively impact stock prices regardless of how well my companies perform.
- What I look for: I look at PCE since the Federal Reserve wants that to average around 2.0% for stable inflation and I also look at CPI. CPI is available earlier than PCE and has recently been ~2pp higher than PCE. I expect PCE to be ~6.6% for May '22 since CPI for May '22 was 8.6%. Not good compared to the Fed's target of ~2.0% for inflation.
- Where: CPI Home : U.S. Bureau of Labor Statistics (bls.gov)
5. GDP from the Atlanta Fed
- Why: Strong business activity in a country translates to higher profits for my companies. It's an important metric as an investor for that reason, but low on my list because GDP released from the BEA isn't timely at all (it's released quarterly), I'm already making decisions as an investor way after this is released, and there are a lot of noisy components that affects the headline number that has no impact on my companies. That's why I like to see the real-time GDP forecast from the Atlanta Fed since their model is built similarly to how GDP is measured and the model really helps me understand how numerous data points that are released over time will impact GDP like home sales, manufacturing indexes, and other data points that are tough to make investment decisions on their own.
- What I look for: In the past, this has generally been around 1.5% – 2.0%. I expect that to stay in the same in the long-run given demographic & productivity trends.
- Where: GDPNow – Federal Reserve Bank of Atlanta (atlantafed.org)
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