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Understanding Economic Indicators
Nearly every week investors see a flow of data that
tracks the economy’s performance and gauges its
possible direction. Known as economic indicators,
the reports describe conditions that can affect the
economy and financial markets.
Think of economic indicators as snapshots—
each a partial glimpse of the economy at a
particular moment. The information they
DIGGING DEEPER
provide can have either a significant effect
on near-term market activity or none at
all. Two examples: Since late 2008, whenever the jobless
rate has approached 10%, the stock market frequently has
stalled or retreated; and in late 2010, signs of an improving
U.S. economy—indicated by increased hiring and expanding
manufacturing—depressed prices on long-term bonds.
indicators fall into three main categories
(all indicators listed are released monthly)
BROAD ECONOMIC SIGNALS
These indicators measure macroeconomic factors such
as employment and the production of goods and services.
Indicator
Employment Situation Summary
Another influential group of indicators measures consumer
spending, which represents about 70% of the nation’s gross
domestic product.
The Employment Situation Summary conducted by the Bureau
of Labor Statistics compiles employment numbers from a
survey of households, businesses, and government agencies.
Indicator Personal Income and Spending
The Department of Commerce’s Personal Income and Outlays report
shows how much money consumers spend and save.
Possible stock market effect: Lower unemployment trends frequently support higher stock prices, while rising unemployment
may portend a stock market downturn.
Possible stock market effect: Stronger-than-expected spending
levels tend to increase optimism about corporate profits, pushing
stock prices higher.
Possible bond market effect: Lower unemployment frequently
leads to concern about inflation, depressing bond prices. Bonds
often respond favorably to higher unemployment, which often
leads the Federal Reserve to lower interest rates.
Possible bond market effect: Higher spending can increase
inflationary pressures, hurting bond prices, which generally are
sensitive to price hikes.
Indicator
Institute for Supply Management
Manufacturing Survey
The survey of corporate purchasers gauges how optimistic or
pessimistic companies are about demand for their goods and
services. Taken together, these perspectives can shed light on
corporations’ likely future output.
10 CONSUMPTION TRACKERS
Indicator
Retail Sales
Department of Commerce data indicate the overall mood of
shoppers based on the money they spent on both small- and
big-ticket items. In particular, economists scrutinize so-called
core retail sales, which strip out auto, building materials, and
gas station sales, due to their volatility.
Possible stock market effect: Equity prices may go up
following a report that indicates rising production levels.
Possible stock market effect: Robust retail sales translate into
corporate revenues and ultimately earnings. A leap in sales may
lead to bigger profits and higher stock prices.
Possible bond market effect: Signs of growing demand and
purchasing may cause concerns about higher inflation
and interest rates, pushing down bond prices.
Possible bond market effect: Fixed income markets get jittery
when spending runs up. Again, larger consumer expenditures
can act as a harbinger of inflation.
T. R O W E PR IC E IN V E STO R JUNE 2011
investing
YOUR INVESTMENT STRATEGY
Indicators offer a glimpse of a large, complex U.S.
economy. Portfolio managers study the figures, along
with other data, to help them make decisions about
investments. While economic indicators are important,
they are not a substitute for the rigorous fundamental
research that managers conduct on the stocks and bonds
that they select for their portfolios. It’s important, therefore, not to base an investment strategy on the latest
economic data but to focus on the individual goals and
time horizons that underlie a successful long-term
investment strategy.
An Economist’s View:
Alan Levenson,
T. Rowe Price
Chief Economist
PRICE MEASURES
Changes in the prices of goods and services can have major
implications for the economy and the markets. Both indicators
described below are released monthly.
Indicator
Consumer Price Index (CPI)
The Bureau of Labor Statistics regularly measures the cost of
a basket of consumer goods and services. Investors and policymakers watch for changes that can signal inflation or deflation.
Possible stock market effect: Mixed. Inflation helps some
companies raise prices and profits but can lead to higher costs
that can erode earnings. Signs of sustained deflation tend to
hurt the stock market.
Possible bond market effect: Rising inflation weighs down bond
returns because it reduces the value of future interest payments
and may lead to higher interest rates. Deflation, or declining
prices, can boost returns of certain bonds.
Indicator
Producer Price Index (PPI)
The PPI examines price fluctuations in raw materials, intermediate
goods, and finished products. Sharply higher producer prices often
point to inflation in the broader economy.
Possible stock market effect: Higher PPI readings may signal
that the cost of business is increasing, potentially squeezing
profits and depressing stock prices. However, producers of raw
materials may benefit from a rising PPI.
Possible bond market effect: Higher PPI may lead investors to
sell bonds out of concern about rising inflation.
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As the point person on economic
matters, Levenson analyzes and
interprets reports and communicates
his viewpoint to a global team of
fund managers and analysts.
Levenson uses the data to piece together a big
picture of the U.S. economy, which he shares
with T. Rowe Price investment management
professionals worldwide. He forecasts economic
growth and inflation and provides a general
assessment of upside and downside risks. This
top-down perspective of the economy helps
portfolio managers assess risk and is an important component of their investment strategy.
Levenson stresses that it’s important to track
a number of indicators for a comprehensive
assessment of current trends. “A single economic indicator would rarely result in significant
portfolio moves,” he explains. The reason is
that T. Rowe Price portfolio managers employ
a bottom-up approach to investing, which
emphasizes the analysis of individual companies, as opposed to a top-down approach, which
places more weight on macroeconomic trends.
Hear more from Levenson on the latest economic
developments at troweprice.com/insights.
JUNE 2011
T. R O W E PR IC E IN V E STOR 11