With a new administration in the White House, investors will be watching closely to see how the economy does. But which metrics and indicators will help them determine whether the economy is sluggish or hopping along?
The vast array of indicators can be confusing, particularly for the uninitiated. There are many of them, and not all are created equal.
That’s why it makes sense to see what the experts watch.
Investment. Look at the rate of net non-residential fixed investment, says Steve Blitz, an independent economist in New York. The metric tracks new investment that businesses make in factories and equipment, and it excludes money spent on repairs and replacing worn-out machines.
You can find the data of how many dollars are being spent on such things at the Federal Reserve economic database.
If the total of net investment is expanding, then more cash is being spent on such factories, and with it there will likely be more hiring for people to work. When this metric starts to grow quickly, that is good news.
Capital flows. On a related matter, investors should watch the flows of capital into the U.S. There are many types of capital flows, including purchasing stocks, as well as direct investment in the economy, as mentioned before.
The Institute for International Finance does a fine job of tracking capital flows around the world and periodically issues reports, which can be found on its website.
If capital keeps flowing into the U.S. or if it increases, then that will be good for economic growth. If it starts flowing out, that’s bad.
The yield curve. A good predictor of whether economy is about to enter a recession is the difference between the yields of the 2- and 10-year U.S. Treasurys.
“When it’s gone negative — the 2-year is higher than the 10-year — that’s often been an early warning sign of a recession,” says Eddy Elfenbein, author of the Crossing Wall Street blog. “It’s been a much better forecaster than a lot of highly paid Wall Street economists.”
[See: 7 Stocks to Buy When a Recession Hits.]
The 10-year T-note is yielding 2.42 percent and the 2-year is yielding 1.21 percent. That means the current difference between the yields of the two bonds is a positive 1.21 percent. “Which means we are in the safe zone, for now,” Elfenbein says.
Defaults. “One needs to look at the bad debt cycle and see whether we are having more defaults,” says Suzanne Hutchins, investment manager at Newton Investment Management, part of BNY Mellon.
Bad debts are those loans that aren’t being paid back on time. Generally, people and businesses pay their debts according to the terms of the loan agreement. (Of course a small minority of people can never be trusted and simply won’t pay.)
However, when the economy softens, people lose jobs and companies see revenue shrink, then the number of bad debts rises, and the default rate increases. “It’s a good indicator of the health of the economy,” Hutchins says.
There are a number of metrics available, but one of the best is the S&P/Experian Consumer Credit Default Composite index, which has been steadily falling since May 2009.
If index starts to rise, then companies that rely on discretionary spending by consumers, such as those held in the Consumer Discretionary Select Sector SPDR exchange-traded fund (ticker: XLY), may suffer from decreased business.
The greenback. It makes sense for foreign investors to keep a close eye on the strength of the U.S. dollar, Hutchins says. There are some emerging market countries, either the government or the private sector, that borrow U.S. dollars.
However, as the greenback rallies it becomes harder for such borrowers to pay the interest on their loans. The stronger dollar means that other currencies are weaker. As a result, the debt in dollars becomes more expensive when measured in terms of the local currencies.
Hutchins says Turkey is particularly exposed to moves in the dollar.
[Read: 7 Ways to Profit From the Rising Dollar.]
You can keep an eye on the strength of the greenback by looking at the Trade-Weighted U.S. Dollar broad index, which tracks the dollar versus a large group of currencies, and was recently at a level last seen in early 2002.
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5 Important Economic Metrics to Know originally appeared on usnews.com
