Top 10 Market Indicators of Economic Development

“In the hands of economists” suggests our co-founder, Bill Bonner, in Hormegeddon, “the more precise the number, the bigger the lie.”

With that maxim in tow, you’ll find the 10 most important indicators of economic development below. But first, a few more grains of salt to take with you… and some context…

“Fraudulent numbers and empty statistics” explains Bill, “build a whole, elaborate tower of hollow, meaningless facts and indicators: the unemployment rate, consumer price inflation, the GDP.

“None are ‘hard’ numbers, yet the economist uses them as a rogue policeman uses his billy club…to beat up on honest citizens.

“Unlike a real, hard science, you can never prove economic hypotheses wrong. There are too many variables, including the most varied variable of all — man. He will do one thing sometimes, another thing the next time, then something else the time after that. Sometimes he seems to respond to economic incentives. Sometimes he’s out to lunch. Why? Because every man is different. Unique. Infinitely complex. And thus, ultimately unknowable.”

And yet, we still encourage you to follow along with the mainstream data, if only begrudgingly.

Why? Because, as Jim Rickards often tells us, whether or not you buy into the statistics is irrelevant. “The question” says Jim, “is, does Janet Yellen buy into them? Once you know what she thinks, you can figure out what she’ll do next.”

Grumble over the price of grass-fed beef, if you must…

Grind your teeth when you hear the unemployment rate dropped again…

Scratch your head when you hear that the money supply expanded by 1%…

But realize that Yellen and Co. are eggheads who impact your life using these numbers. That alone is reason enough to keep tabs on what’s happening.

With that, read on for the Daily Reckoning’s top ten economic indicators…

1. GDP

Gross Domestic Product, or GDP, is the total market value of all goods and services produced by a country in a specific time period, typically a year. This includes earnings from foreign investments.

There is something called “real” GDP which broadly measures the wealth of a society by figuring out how fast profits might grow, and the expected return on capital.

It’s labeled “real” because it’s a comprehensive way to gauge the economic well-being of a nation’s economy. Every year the data must be adjusted to account for changes in prices from year to year.

Getting down to brass tacks, you can use this equation to calculate GDP:

GDP = Consumption + Government Expenditures + Investment + Exports – Imports

So let’s break that down a bit.

Consumption includes things like durable goods – items expected to last more than three years, like cars, electronics, and toys – and nondurable goods like food and clothing.

Government expenditures is a fancy term for things like roads, schools, and defense.

Investment spending is divided into nonresidential (equipment, plants) and residential (single or multi-family homes), as well as business inventories.

Net exports means exports that are added to GDP, and imports that are deducted from GDP.

But there’s a small problem with deception when it comes to GDP.

In a 2012 The Daily Reckoning article, Bill Bonner discussed some of the pitfalls of relying on GDP information:

The guy who drives out to the neighborhood bar, spends all night drinking, and then drives back home…stimulates GDP. Better yet, he crashes his car on the way home. Then, he is a real hero to the economy. He has to buy another car.

The poor sap who stays at home is a drag on growth.

The fellow who goes to McDonald’s night after night rather than cooking his own burgers…the fellow who leaves his window open with the air-conditioning running…the fellow who hires a lawn service company rather than cutting his own grass…the man who borrows money to finance a house or a vacation — all of them add to the GDP.

The guy who plants his own garden…who cuts his own firewood…who fixes his own roof — he is a traitor to the economy. He needs to get another job…borrow money…burn more gasoline…to buy more stuff…!

The trouble with GDP growth is that it only tells you how fast the wheels are spinning. It doesn’t tell you if you’re getting anywhere.

Although it has a reputation for being pretty bogus, GDP matters and you need to keep your eye on it.

Not only does the Federal Reserve use this data to adjust monetary policy, if the GDP declines for two quarters in a row, or more, that means the economy is in a recession.

But, like I mentioned, there is usually more behind the smoke-and-mirrors numbers of GDP. Officially, the numbers may say tell one story, but in reality, a lot of us are looking around and thinking, What gives?

Our friend John Williams’ Shadow Statis shows an alternate GDP chart, which reflects the inflation-adjusted, or real, year-to-year GDP change, adjusted for distortions in government inflation usage and methodological changes.

Take a look at how the two stats differ:

A blind man could see those numbers are a little fishy.

We’ve said it before and we’ll say it again, there’s more to these numbers than meets the eye, or ear, or whatever part of you is consuming doctored, mainstream information.

The data is released quarterly by the U.S. Department of Commerce’s Bureau of Economic Analysis within the last week to 10 days of each month at the end of the quarter, including an explanation of why the GDP went up or down compared to the previous quarter.

2. Money Supply

Money supply is a representation of the total amount of money a country has in circulation. M2 is slightly more specific.

Different groups of numbers show different subsets of money, based on how liquid they are, or how easily you can sell them.

M0 is just the dollar value of physical cash and coin, which is the most liquid.

M1 includes all of M0, as well as checking accounts, traveler’s checks and demand deposits.

M2 includes the dollar value of all of M1 in addition to savings accounts, time deposits of less than $100,000 (like certificates of deposit), and money market funds held by investors.

This includes:

• Physical currency (bills and coins)
• Demand deposit savings and checking accounts
• Travelers checks
• Assets in retail money market accounts
• Small money market mutual funds (less than 100,000)
• Individual time deposits and savings deposits (certificates of deposits, repurchase agreements, eurodollar holdings)

Out of all the indicators of economic development, money supply seems like the most laughable.

Surely that number should never be trusted as accurate. Everyone knows the Fed is printing and pumping so much fiat currency into the economy that trusting money supply numbers would be like believing the world is flat.

The Fed uses this data to assess current economic and financial conditions, and to help decide when or how to change interest rates and, ultimately, monetary policy, to either bolster or reduce the money supply.

Money supply is one of the major ways the Fed controls the economy, and, in our opinion, one of their biggest blunders.

Here at The DR, we like to use the punch bowl analogy:

The economy is one big party, and the money supply is the punch bowl. The Fed are the hosts, or chaperones, depending on how you look at it.

It’s the Fed’s job to put out the punch bowl to get the party going, and to take it away just before everyone gets totally sloshed.

But the Fed stinks when it comes to timing, and that never happens.

The party is either pathetically lame, or everyone is wasted and the place is completely trashed. Usually it’s the latter, and that, dear readers, is how the cycle of booms and busts continue.

In Financial Reckoning Day Fallout, Addison and Bill explain that, “For the past 15 years, the US money supply has grown about twice as fast as GDP. Federal government liabilities, meanwhile, have grown three times as fast. As a result, the US now has more financial obligations than assets.”

That was in 2009, and you can only imagine how much worse it’s gotten since then.

Actually, some economists believe that money supply data has fallen out of sync with other economic indicators, and the relevancy of the information has been fading for about two decades after a wave of changes, like introducing new depository products, the internationalization of the economy, and the movement of consumer funds from bank deposits to investment accounts.

And, you know, that little counterfeiting habit the Fed can’t seem to kick.

With money supply, you’re typically better off paying attention to the longer-term trends, particularly at the six month mark.

Keep in mind, however, that changes in the money supply rarely move the markets in the short term.

The data is released on Thursdays (weekly) and on either the second or third week of the month by the Board of Governors of the Federal Reserve System. Monthly data is available all the way back to January 1959, and weekly information since January 1975.

3. CPI

Consumer Price Index, or CPI, measures changes in consumer prices, or the retail prices paid for about 80,000 specific goods and services (called the market basket) by urban consumers for a specific month.

It acts as a sort of gauge of the inflation rate related to purchasing those goods and services. Think of it as a measure of the changes in one individual’s cost of living, not every single item a person buys.

Give this Inflation Calculator a try to see what we mean. According to the Bureau of Labor Statistics, $100 in April of 2015 was worth $99.80. But the real number, according to ShadowStats, is really $107.38.

That’s right! Your Benjamin was worth more in 1995 than it’s worth today.

CPI instead takes a sampling of about 200 subcategories worth of goods and services, which are then divided into eight major categories.

These categories are updated every couple of years to eliminate items that are now obsolete:

1. Food and Beverage
2. Housing (According to Executive Publisher of the Daily Reckoning, Addison Wiggin, and Bill Bonner’s book Empire of Debt, more than a quarter of CPI is the cost of housing)
3. Apparel
4. Transportation
5. Medical Care
6. Recreation
7. Education and Communication
8. Other

It seems mind-boggling to comprehend how this information would even be collected. I mean, they can’t just check the tags at Brooks Brothers and knock down the doors of a couple thousand landlords, can they?

They can, and they do.

The Bureau of Labor Statistics calculates and publishes this data on a monthly basis, and to gather the data, econ assistants personally visit or call over 23,000 stores and about 50,000 landlords or tenants in 87 urban areas. Every. Single. Month.

After that, commodity specialists and experts review the data and adjust the information accordingly for changes in size or quality of said product.

It’s important to note that CPI does not include income, Social Security taxes, or investments in stocks, bonds or life insurance. It does, however, include all sales taxes associated with the purchases of these goods/services.

This statistic is scrutinized in particular by financial economists, since changes in inflation can light a fire under the Fed and spur them to take action toward changing monetary policy.

There’s another problem with taking CPI at face value — there’s a subset to this data, called “core CPI.”

Core Consumer Price Index is equal to CPI, but it doesn’t include energy and food prices. The government will tell you food and energy prices are excluded because they’re simply too volatile — but I know getting hit with a $400 gas bill for my tiny apartment this past winter, or shelling out four bucks on an avocado, matters to me and my wallet.

The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) releases the national CPI data. CPIs for three specific metropolitan areas are published monthly, while CPIs for other specific metropolitan regions are published every other month.

4. PPI

Called the Wholesale Price Index until 1978, the Producer Price Index, or PPI, measures and tracks the changes over time of the average selling price of domestically-produced goods and services.

Think of it as the business-side equivalent to CPI; it instead captures price movements at the wholesale level, before prices get their upward tick for retail.

Every month, the PPI monitors price changes from 25,000 goods-producing sectors at three stages of production; finished goods, intermediate goods, and crude goods. It includes categories like:

• Agriculture
• Forestry
• Fisheries
• Mining
• Manufacturing

John Williams explains the current problem with PPI, writing:

Once predominantly a measure of manufactured goods, PPI in the last decade or two increasingly has become a useless measure of the services sector “wholesale” inflation.

Due to the limited scope of services surveying, those costs are heavily understated and artificially depress inflation reported for the broad finished goods index. For example, it is rare to find a PPI measure of insurance costs that represents more than 20 percent of the inflation rate seen in actual policy costs.

On top of all survey issues, the PPI measures usually are viewed on a seasonally-adjusted basis. Instead of smoothed monthly changes, however, the resulting adjusted data tend to show a high level of random volatility in terms of month-to-month change.

Viewed in terms of year-to-year change, or the annual rate of inflation, though, the series begins to show a strong leading correlation to the CPI.

So if it’s a bunch of malarkey, why do you care about PPI, again?

Because unfortunately, dear readers, the sick irony of it all is that the policy makers care about PPI, and it influences their decisions.

The numbers could be as bogus as Sarah Palin, but to play the game, and play it well, you gotta play by the rules of the policy makers.

The BLS releases this date monthly, during the second full week of the month after the reporting month.

This index is important because it is the very first inflation measure available every month. If you watch crude prices –the first in the chain of production trends– investors can sometimes spot inflation in the pipeline, before it shows up in the Consumer Price Index.

5. CCI

Consumer Confidence Index (CCI), or what is sometimes referred to as the Consumer Confidence Survey, measures how consumers feel about the current and future economic conditions.

It’s a gauge of the public’s overall confidence in the health of the US economy, which ultimately is a reflection of how optimistic or pessimistic the national mood is.

A monthly survey of 5,000 random individuals is conducted (about 3,500 respond), which asks questions from five major categories:

• Thoughts and feelings about business conditions, employment, and the labor market
• Expectations for employment and financial and business conditions in the next six months
• Consumer spending plans like buying cars, houses, appliances, and other big-ticket items in the next six months
• Vacation plans in the next six months
• Expectations of inflation, interest rates, and stock prices in the next 12 months.

People can give three opinions; positive, negative, and neutral. The Conference Board’s Consumer Research Center releases the data monthly, on the last Tuesday of each month.

Paying attention to these numbers can signal whether or not consumers are more inclined to spend or save their money, based on their sentiments about financial and employment prospects.

But, as Addison and Bill remind us, it’s not that cut and dry:

The problem with consumers was not that they lacked confidence, but that they had too much.

Their apparent financial success combined with the success of the Fed, had made them confident to the point of recklessness… in the economy, the absence of qualms or question marks was unsettling.

Consumers increased personal consumption at a 6 percent rate in the fourth quarter of 2001–the same quarter in which the economy was supposed to be reeling from the recession and the terrorist attacks of September 11…

Consumers go more deeply into debt only when they are pretty sure the extra debt will be no problem for them… the confidence of US consumers and investors was taken as good news throughout the world. People thought it meant good things to come…

Confidence is a trailing indicator. The more there is of it, the greater the boom left behind, and the greater the trouble that lies ahead.

Consumer confidence is a sketchy number at best.

Think back to that 5,000 number – the number of individuals surveyed for this data – that’s out of a population of, oh, 315 million. Suddenly sounds pretty unreliable, right?

It seems like a no-brainer that disappointment can lead to disinvestment, and that consumers are more likely to spend money when they feel confident about their financial futures. But in the case of Americans who like to spend like there’s no tomorrow, it may not be as accurate of an indicator of economic health as one would think.

6. Employment

Current Employment Statistics, or CES, provide data on national employment, unemployment, and wages and earnings across all non-agricultural industries, including civilian government workers.

This information is often specified and differentiated, like the employment or unemployment rate of men and women, or teens, or different ethnic groups.

“Employed” is defined as full and part-time workers, as well as part-time and temporary employees who received pay for the designated period. CES numbers do not include business proprietors, self-employed, or volunteers.

CES matters because this is the earliest indicator of economic trends that is released each month, and it’s a no-brainer that high employment rates indicate the well-being of the economy and labor force.

It is important to keep in mind, however, that employment statistics can be misleading in terms of the market — sometimes they’re all sizzle and no steak.

You might read a report saying how the economy is on the mend due to the addition of 200,000 new jobs, but those may all be part-time gigs.

And anyone who has ever hustled for a paycheck knows that 200,000 part-time jobs and 200,000 full-time jobs are not the same thing. They do not have the same impact on the economy.

According to CNBC, a lot of economists look past this employment information to a figure the BLS calls “U-6,” which is defined as “total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers.”

See the disparity for yourselves with this handy chart from February 2015:

The point here is that the U-6 is more volatile than in the main unemployment rate, so you’re not being fed the full meal here if you’re blindly accepting unemployment stats at face value, folks.

In a 2010 Daily Reckoning article entitled “Stockholm Syndrome and The State,” editor Joel Bowman discusses this exact issue:

Rising from 9.7% to 9.9% last month, the unemployment situation is clearly NOT improving.

The government’s own Bureau of Labor Statistics showed that the number of long-term unemployed individuals (defined as those without work for at least 27 weeks) continued trending higher, reaching 6.7 million last month.

45.9% of all unemployed people in the US now fall into this category. Those sometimes referred to as “involuntary part-time workers” (workers whose hours had been cut, for example) still stands at 9.2 million.

Again, not counted in the unemployment figure are another 2.4 million “marginally attached” workers, including 1.2 million “discouraged” workers who, for all intents and purposes, have simply given up looking for employment.

That figure is up 457,000 from a year earlier. That a supposedly benevolent Big Brother can merely define these destitute individuals out of existence is nothing short of a disgrace of the highest order and should, at the very least, give some indication as to the real motivations of those supposedly acting as public ‘servants.’

Even The Washington Post has a clever name for this problem — the “incredible shrinking labor force” — for those in the work pool who are drowning before they are rescued.

Back in 2007, 66% of Americans had a job or were actively seeking work.

Today, that number is at 63% and falling.

Take a look at this chart, which shows the drop off in labor force participation rate by age:

The Washington Post explains:

Labor force participation rates for younger workers, ages 16 to 54, has been dropping sharply for a number of reasons — some good, some terrible.

Younger people are more likely to stay in school than they used to. But the terrible economy is also keeping some people at home. The decline of manufacturing has left many older workers unable to find new jobs. And, as we’ve seen, some workers are moving to disability programs.

On the flip side, the labor force participation rate for older workers, age 55 and up, has been rising of late. People who were near retirement saw their savings evaporate after the financial crisis, so some of them are now working longer to repair the damage.

As you can see there’s more to employment data than meets the eye.

The BLS releases the data on a monthly basis, usually on the first Friday following the month in which data was collected, but always with the first 10 days after month-end.

7. Retail Numbers

The data from US retail and food service sales is tracked monthly, detailing changes from previous periods and identifying which sectors had increases and/or decreases in sales.

Out of our nation’s three million retail and food service firms, a sampling of 5,000 random establishments makes up the data.

Vehicle sales tend to be pretty volatile and can throw off an underlying pattern of spending, so the figures are broken down to include and exclude automobile sales.

Paying attention to shopping and eating habits of the American people might seem like a pretty dumb way to watch the market, but the junk people buy and the food they eat actually makes up about two-thirds of the annual U.S. GDP.

This data is used to track consumer spending patterns and forecast how much and where people will be spending money in the future.

The US department of Commerce’s US Census Bureau releases the data monthly, during the second week of each month.

8. Housing Starts

Housing starts, formerly known as ‘New Residential Construction,’ is an approximate measure of all the new private homes and housing units built (or had some construction done) during a given month.

In other words, this figure indicates the demand for newly built homes.

Housing starts are important because they can be highly sensitive to change in mortgage rates, and although they’re pretty volatile, they represent about 4% of annual GDP, as well as signaling the effects of current financial conditions and upcoming changes in the economy.

A strong housing start measurement is a key indicator of economic well-being, since it reflects healthy levels of employment and consumer confidence.

People are jumping for joy since construction industries are (slowly) recovering, but seemingly fantastic housing starts numbers are something else entirely.

New home sales are hovering around 517,000 per month, compared to 1.4 million back in the mid-2000s.

If you want to gain an edge by watching Housing Starts, do like analysts and economists do and watch for longer-term trends, and remember that building new homes increases demand for construction workers, laborers, and building materials.

At the end of the day, housing and construction projects are economic drivers that strengthen our economy.

The US Department of commerce’s US Census Bureau releases the data monthly, within two to three weeks after the end of the reporting month.

9. Manufacturing Trade Inventories and Sales

This data combines the value of trade sales and shipments by manufacturers in a specific month. It also indicates the combined values of inventories in the wholesale and retail business sectors, and manufacturing.

The information comes from over 17,000 manufacturing, retail, and wholesale companies in 160 industries. The current and most recent past month’s inventory/sales ratios are also provided.

This one may seem like an outlier, but the data provided here is the main source of information on the current status of business inventories and business sales.

And why does that matter?

It matters because inventory rates give investors clues about the growth (or lack thereof) of the economy.

A growth in business inventories may mean sales are slow and the economy’s rate of growth is also slowing. If sales are slowing, businesses may be forced to cut production of goods, and that can eventually translate into inventory reductions.

The US Department of Commerce’s US Census Bureau release the data on a monthly basis, about six weeks after the end of the subject month.

10. S&P 500

S&P 500, or the Standard & Poor’s 500 Stock Index, is a market-value weighted index of 500 of the leading, publicly-owned, American companies that represent over 70% of the total market capitalization of the US stock market.

These stocks are combined into one equity basket, which has become the industry standard and benchmark for the overall performance of the U.S. equity markets.

Most analysts use the S&P as their preferred benchmark, because it provides diverse sector coverage — an obvious no-brainer as to why you’d want to keep an eye on the stock market.

It measures our country’s stock of capital and gauges future business and consumer confidence, meaning it’s arguably the single best way to track the performance of the largest and most dominant American companies.

If the S&P 500 grows, that usually means growth of business investment.

It can also be a clue to higher future consumer spending. If the S&P is in decline, that could be a signal that consumers and businesses alike are tightening their belts.

But first, confession time.

The S&P 500 isn’t exactly an indicator of economic development, but a lot of people tend to confuse the economy with the stock market.

If the stocks of big businesses go up, that means the businesses are doing well, which means the economy is doing well too. Right?

That would make sense, but we’re talking about people and policies that rarely make sense, if ever.

When it comes to the stock market, you need to keep a few things in perspective. Gene Marks at Philly Mag writes:

This average, so closely watched, is made up of just 30 industrial companies.

Also, with interest rates at rock bottom, many economists credit the stock market’s rise not to an improving economy but to the Fed’s controversial rounds of quantitative easing, which has put easier money in the hands of banks and investors who, in turn, plow it back into the markets…

But honestly, we’re still not back at the levels we were from five years ago. Many of our investments remain in the red and we find ourselves hoping for factors beyond our control that will cause the markets to move into an area where we’ll see an actual return on our initial outlays.

Need more convincing? I spoke with Rick Rule about this, too. Here’s what he told me…

The second thing is that Americans are increasingly teaching themselves to confuse the Dow and the S&P 500 with the state of the U.S. economy.  There has become a psychological marker that says that equity prices are the same as the economy…

I don’t think that there’s any doubt at all that a lot of the strength in the S&P 500, despite the many fine companies that inhabit the S&P 500, that much of the strength in the S&P 500 has come from return seeking that would otherwise probably go to savings products were the interest rate at a level that didn’t penalize people for saving.

Keeping that in mind, your best bet on the S&P is to go long. Short-term fluctuations probably won’t tell you anything of value, but the 10-year total return, however, has become a common indicator of what you can expect in long-term trends.

Now that you’re up to speed on where you should invest your attention and energy in the sea of economic indicators out there, go forth and profit!

À tout à l’heure,

Genevieve LeFranc
for The Daily Reckoning

P.S. New York Times best selling book, The Road to Ruin might be Jim Rickards most important work to date. What will be the “ice-9” molecule that freezes our entire financial system? How will the global elites respond? Most importantly, how can you shield yourself and ensure your financial safety for the future? Click HERE to learn how to get an insiders analysis on the critical turning points in our economy.