3 Economic Indicators to Keep in Mind

WeathervaneIf businesses are boats, then the economy is the water we all putz around in. (The metaphor is limited, but I think this makes consumers the fish.) Reading economic indicators with accuracy is like being able to predict rain, high winds, or a clear day. Having a reliable forecast of the conditions affects the decisions we make. I’ll go out if it’s sunny, but not if there’s a hurricane. Chance of rain? I’ll risk it if I think I can catch some fish.

The current global economic climate is stormy and people have been cautious to go sailing, so to speak. The U.S. markets in particular have received a lot of attention and some experts (economic meteorologists) are saying this could be the year of equities. Indicators like the Service Report help Mr. Market decide if he wants to weigh anchor or stay inside and play boardgames.

Non-Manufacturing ISM Report on Business or Service Report

What is it?

The Institute for Supply Management releases its report on the “Non-Manufacturing Index” once a month. The Index is compiled from surveys of purchasing and supply executives at over 400 firms across 60 sectors.

The report is broken down into 12 indexes and 13 industries. Like most indices, it shows growth when it is above 50 percent, and contraction below 50 percent.

Why is it useful?

Perhaps the single-most useful index in the Service Report is the Business Activity Index. In the December ISM report, the Business Activity Index dropped 0.9 percentage points to 60.3 percent. This is currently the highest level for any of the Indexes, and represents relatively strong growth, even if the rate fell from November. This is the 41st consecutive month of growth for the Business Activity Index. This is clearly one sign of economic health.

Individual investors will find different parts of the report more useful than others, but another broad Index is employment. The Employment Index can be used to help paint a clearer picture of the job environment — which can be used to diagnose economic health and forecast changes in the market. In December, the Index grew 6 percentage points — a significant jump –to 56.3 percent, and has been growing for 5 consecutive months.

This means that hiring activity has increased as companies look for people to staff new ventures, or have regained fiscal confidence and have ended hiring freezes.

Here’s December’s Service Report, released on January 4.

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