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Listener Melanie Cost Young, from Jacksonville, Florida, asked Marketplace this question:
I’m wondering which regularly reported economic data are the most reliable predictors of future economic performance?
Betsey Stevenson served as chief economist in the Labor Department under President Barrack Obama, and now teaches at the University of Michigan. She tracks ten economic statistics closely:
Gross Domestic Product (GDP), Gross Domestic Income (GDI) (see here), nonfarm payrolls and the unemployment rate (from the monthly employment report here), initial weekly unemployment claims (see here), consumer sentiment (see here), business confidence (see here), Consumer Price Inflation (CPI) (see here), the Employment Cost Index (ECI) (see here), and the S&P 500 (see here).
Four of Stevenson’s top stats track employment or the likelihood that businesses will hire. Those measures are important because when people have jobs, and can find jobs easily, it drives more consumer spending, home construction, auto production, vacation travel and the like. When unemployment is very low and employers start to have trouble finding qualified workers, they invest more in labor-saving technology.
Stevenson points out that the monthly job creation and unemployment numbers are lagging indicators. “So even when things start slowing down,” she said, “people like their employees so they don’t immediately start laying people off. They think, ‘there’s a chance things might turn out well.’”
Stevenson said financial market data like the S&P 500 are more useful for predicting future performance, as investors try to anticipate upcoming earnings and economic growth. “It’s real-time data — people are putting their money where their mouth is right as they’re feeling it,” she said. “So the stock market can predict recessions. The problem is, the stock market predicts way more recessions than actually happen.”
Walter Zimmermann, chief technical analyst at trading firm ICAP, agrees that the markets can be analyzed as future economic indicators. “Major stock indices are forward-looking predictive patterns,” he said. “They’re not concerned with today, they’re looking ahead.”
Zimmermann tracks the market for four specific indicators of trouble ahead: “Overly valued, overly bullish, overly indebted, and peaking or bottoming patterns in the market. Those are the things that we find most useful for protecting against buying the highs and selling the lows.”
Brad McMillan, chief investment officer at Commonwealth Financial Network, puts the Labor Department’s employment reports at the top of his stat list, along with consumer confidence. But he said it’s important not to focus on short-term fluctuations. “We get a lot of headlines on the month-to-month numbers,” he said, “but they don’t matter as much. What matters is the change on a year-to-year basis. When that drops below about 2 million, it signals we have trouble ahead.”
Employers have added more than 2.3 million jobs in the past twelve months.
Labor economist Aparna Mathur at the American Enterprise Institute said that at this late stage of the economic recovery, she’s paying close attention to wage growth, long-term unemployment, and labor under-utilization — people working part-time because they can’t find full-time work.
And she wants to know more about the spread of labor-saving technology. “We have studies suggesting that robots are replacing workers in certain industries at a fast pace,” she said. “So if I could look ahead to the future of work, then I would try to construct some measure of job displacement through automation.”
|Check out the rest of our I've Always Wondered series|
|Should you be worried about big dips in the stock market?|
|U.S. added 213,000 jobs in June, unemployment rose to 4 percent|