Sunday, July 12, 2009

Economic Indicators That May Signal A Bottom In The Economy

As important as it may seem to review technical stock market data, an investor should also review technical economic data. The goal is to review the economic data in order to spot potential turning points in the overall economy.

A recent article in Kiplinger's Personal Finance magazine outlined six economic indicators worth reviewing that might help an investor determine the bottom in the economy. When three of the below six indicators turn in a more favorable direction, an economic recovery is likely unfolding.

Jobless Claims
  • Look for a four-week moving average hitting 550,000 and continuing to decline would signal that companies have stopped slashing jobs.

Durable Goods Orders
  • A two- or three-month uptrend in orders -- excluding defense, aircraft and other transportation equipment -- would presage an expanding economy.
Retail Sales
  • Two to three straight months of increasing sales would mean consumers have more money in their pockets and are willing to spend it.
Existing Home Sales
  • Two or three consecutive months of growth would be a sign that investors and would-be homeowners are back in the market.
existing home sales(Chart Courtesy of Calculated Risk)
Data Source: National Association of Realtors

Consumer Confidence
  • An index in the 60s would suggest that consumers will be less tightfisted.
Interest Rate Spread
  • A narrowing of the gap to about one-half of a percentage point would signal improving health in the banking sector.
TED spread chartSource: Bloomberg

One last point to keep in mind is the market tends to be leading indicator. As a result, once a number of the data points become more favorable, the market may move higher in advance of the economic data confirming a stronger or improving economy. I wrote a post on March 9th that touched on the lagging nature of the consumer confidence data.


How To Spot The Bottom
Kiplinger's Personal Finance
July 2009

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