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How Many Analyst and Investors Gauge the US Economy and the Stock Market

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In addition to company and industry-level input, the state of the overall economy also provides insight for analysts and investors to make decisions, below is what the vast majority use” — Paul Ebeling

These are the Top US Economic Indicators, and the Key takaways, as follows:

Economic indicators provide analysts and investors insight about the state of an economy and whether it is in expansion or contraction.

Most indicators are released monthly by government agencies and typically provide input on activity in the previous month and yr for comparison purposes.

The Key takeaways are up 1st

  • Measuring an economy and predicting its future trajectory relies on analyzing Key pieces of macroeconomic data.
  • Known as economic indicators, these pieces of data quantify various aspects of an economy large or small.
  • Here is a look at several of the most important indicators that measure everything from economic growth to changes in prices to unemployment.

GDP: The gross domestic product, or GDP, of an economy provides the overall value of the goods and services it produces and indicates whether an economy is growing or slowing. The US Department of Commerce’s look at quarterly change in GDP breaks down the activity in terms of changes in consumer spending, business investment, and government spending, as well as the net impact of foreign trade. The government puts out a preliminary 1st estimate, updates with a revised 2nd reading as it gets more input, and then comes up with a 3rd and final report.

Employment Figures: The US Department of Labor puts out a monthly release on employment, including the number of jobs created the previous month by the private sector, the government and some specific industries, as well as the national unemployment rate. Low unemployment can point to a strong economy, but can also predict rising inflation.

Industrial Production: Industrial production is a measure of output of manufacturing-based industries, including those producing goods for consumers and businesses. This release, put out monthly by the Fed, also provides input on capacity utilization in the factory sector.

Consumer Spending: Consumer spending accounts for about 72% of US GDP and is a good gauge of consumer health. The US Department of Commerce’s monthly release on personal income and outlays provides input on consumer spending. It also provides input on inflation through a price index that reflects changes in how much consumers have to spend to buy certain items. For instance, a company that makes its income largely based on consumer spending is not likely to do well in a recession.

Inflation: Inflation is the general price level rise of goods and services in an economy. Too much inflation can mean the economy is overheating, while very low inflation can be a indicator of coming economic recession.

Depending upon the selected set of goods and services used, multiple types of inflation values are calculated and tracked as inflation indexes. Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). The Producer Price Index (PPI) is also used to measure inflation as it relates to producers.

Home Sales: Home sales represent a major purchase for most people. Thus, the US Department of Commerce’s monthly report on new residential sales also speaks to consumer sentiment. This report, based on contracts to buy new or existing homes, provides input on sales of single-family homes nationally and also provides a regional breakup, as well as input on median and average sales prices. The National Association of Realtors (NAR), a private realty trade association, puts out a monthly report on sales of existing homes, based on closed sales.

Home Building: The number of houses that builders started working on, as well as the number of permits that they obtained to start building houses, indicates real estate developers’ confidence level in the economy. The Census Bureau of the US Department of Commerce’s monthly release on new residential construction provides this input nationally and also breaks it up by region.

Construction Spending: Another construction-based indicator is the change in the monthly construction spending, in USDs, nationally. This spending encompasses various construction-related expenses, such as labor and materials and engineering work. The US Department of Commerce provides a breakup for public and private construction, as well as for residential and nonresidential.

Manufacturing Demand: A report on manufacturers’ shipments, inventories, and orders gives an indication of demand for manufactured items. The US Department of Commerce puts out a preliminary monthly report as well as a more lengthy report as a follow up. These reports break manufactured goods up by many different types and industries, from electronic instruments, to machine tools, to nondurable consumer goods.

Retail Sales: The US Department of Commerce’s monthly release on retail and food services sales is an indication of consumer health. This report breaks up retail sales in various sectors, such as the sales in department stores, as well as furniture and home furnishing stores.

There are several more, but the above indicators are the 1s we report monthly on Live Trading News.

The Bottom Line: Investors can better fine-tune their investing decisions with the help of economic indicators. And analyst can fine tune their predictions on the direction of the economy. No 1 indicator is omniscient, using a number of indicators together can provide hints about the state of the US economy and any others large and small.

When looking a the benchmark stock indexes or individual stocks we build on all of the above, the historic, immediate chart patterns and corporate guidance overall. In addition to the above over the last many years we have several proprietary ‘fine-tuners’ in our filter.

Economist Bruce WD Barren explains that the mean P/E Ratio now shows that there is still substantial scope for the S&P 500 to grow. Both Shayne and I are in agreement with Bruce on benchmark index’s future in here.

UoP Wharton Professor Jeremy Siegel has suggested that the average P/E ratio of about 15 (or earnings yield of about 6.6%) arises due to the long term returns for stocks of about 6.8%. In his book Stocks for the Long Run, (2002 edition) he argued that with favorable developments like the lower capital gains tax rates and transaction costs, P/E ratio in “low twenties” is sustainable, despite being higher than the historic average of 14-16.

For our readers that do not fully understand the P/E Ratio: The price earnings ratio is calculated by dividing a company’s stock price by it’s EPS (earnings per share). In other words, the price earnings ratio shows what the market is willing to pay for a stock based on its current earnings. It is one of the most widely-used valuation metrics for stocks. The PE ratio of the S&P 500 divides the index (current market price) by the reported earnings of the trailing twelve months.

The resulting number tells you how much you are paying per dollar that the company earns. For example, a ratio of 15 means that investors are willing to pay $15 for every USD of company earnings. This is why the P/E ratio is sometimes referred to as the “earnings multiple” or just “multiple.”

You generally use the P/E ratio by comparing it to other P/E ratios of companies in the same industry or to past P/E ratios of the same company. If you are comparing same-sector companies, the one with the lower P/E may be undervalued. Or if you’re looking at past data for one company, a higher number could mean it’s no longer a bargain.

There are multiple versions of the P/E ratio, depending on whether earnings are projected or realized, and the type of earnings.

  • “Trailing P/E” uses the weighted average share price of common shares in issue divided by the net income for the most recent 12-month period. This is the most common meaning of “P/E” if no other qualifier is specified. Monthly earnings data for individual companies are not available, and in any case usually fluctuate seasonally, so the previous four quarterly earnings reports are used and EPS (earnings per share) are updated quarterly.
  • Note, each company chooses its own financial year so the timing of updates varies from one to another.
  • “Trailing P/E from continued operations” uses operating earnings, which exclude earnings from discontinued operations, extraordinary items (e.g. 1-off windfalls and write-downs), and accounting changes.
  • “Forward P/E”: Instead of net income, this uses estimated net earnings over next 12 months. Estimates are typically derived as the mean of those published by a select group of analysts (selection criteria are rarely cited).

This column is meant to be informative, educational and helpful in planning for success in the world of investing in the financial sector.

Editors Notes: 1. The stock market is not the economy but they are very closely tied together, and 2. Since Y 1947, earnings per share have grown at 6.21% annually, while the economy expanded by 6.47% annually.

Have a healthy week, Keep the Faith!

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Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.