Economic indicators point the way
Leading economic indicators are like road signs, pointing to what lies ahead for the economy. We often read or hear about these signposts from so-called financial experts. But, these pundits often seem to be out in the fast lane, zooming ahead while we scramble to figure out what was just said. Take a moment to slow down a bit, catch your breath and understand exactly how these leading indicators will affect your investments.
Consumer Price Index (CPI)
This is the rate of inflation. The CPI measures the costs of basics like food, housing, transportation, apparel, medical care and entertainment. A rising CPI signals higher inflation. When inflation is high, each dollar will buy fewer goods and services. Low inflation means consumers can purchase more.
The monthly rise or fall in unemployment is an indicator of economic health. Lower unemployment is usually good news for the economy because more people are working and earning and spending money.
A strong increase in the number of new jobs indicates an expanding economy and tends to boost consumer confidence.
Consumer Confidence Index (CCI)
The CCI reflects consumers’ perceptions about the economy and their spending plans. When consumers feel confident, they tend to spend and invest more of their money. However, when they are nervous, consumers tend to hold off on making major purchases.
When housing starts are high, it means that there has been a lot of construction on new houses, condos and apartment buildings. Low housing starts could indicate that the economy is slowing down.
Gross Domestic Product (GDP)
The GDP measures the total value of all the finished goods and services produced within Canada. A flat or shrinking GDP suggests recession may lie ahead, while a rapidly growing GDP raises fears of inflation. Moderate growth, however, suggests a stable economy.
Reading the signs
If the leading economic indicators suggest that the economy is slowing down, investors may become wary and decide to sell stocks and bonds. As a result, stock and bond prices may fall. When good economic times are indicated, investors buy stocks because they anticipate that consumers will spend money and corporate profits will rise. As a result, stock prices increase.
Economic indicators are used to predict where the economy is headed. If an indicator comes out in line with market expectation, it causes no reaction. But, when an indicator’s results are unexpected, the financial markets may react in a contradictory way. For example, a low unemployment report is generally considered good news, but if investors fear that a tight job market will lead to higher salaries, higher prices and inflation, the good news can become bad news.
Follow your own lead
The market’s reactions to economic indicators are often short-lived. Pay attention to your own investment roadmap and don’t get distracted by misleading signs. If you panic and turn back every time you see a different economic indicator, you will never reach your destination. So shift into gear, move out of the slow lane and get on with your journey.
This blog post is for informational purposes only and is not and should not be construed as, professional advice to any individual. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The information contained in this report is based on material believed to be reliable, but BMO Financial Group cannot guarantee the information is accurate or complete. BMO Financial Group does not undertake to advise individuals as to a change in the information provided. All rights are reserved. No part of this report may be reproduced in any form, or referred to in any other publication, without the express written permission of BMO Financial Group. ®/™ Registered trade-marks/trade-marks of Bank of Montreal, used under license.