Economic Scorecard

Since the explosion of cable TV and the massive media coverage of all things financial, we have been bombarded with economic terms and statistics that only people with PhDs use in everyday conversation. Not only are we crushed by the sheer volume of data, but the various talking heads draw vastly different conclusions from the same set of ever-changing numbers. How does anyone make any sense of this? 

One approach is to use a scorecard that shows where the economy is currently and where has it been, using a handful of key indicators.  There are hundreds of economic indicators but the scorecard will limit it to the ones that best represent the economy.  The first step is to define what the economy is and what are we measuring.

Loosely stated, an economy is all the activities involved with the production and distribution of goods and services in a geographic area. There are many moving pieces, some more important than others. For investors, there are six primary factors to understand:

• ·         Employment
• ·         Personal income
• ·         Retail sales
• ·         Consumer confidence
• ·         Government spending
• ·         Monetary policy

The following is a table put together by Helen Modly.  The table shows the current status of each of those economic indicators.

The measurements

1.       Employment: "I have a job." Employment is the single most important variable in the health of any economy. Jobs are the engine that drives economic development as it provides the monetary source (employee compensation) for infusing all the moving parts within the economy. We evaluate employment by measuring its inverse-unemployment. When unemployment is low, economies expand.

2.       Personal income: "I get paid." People with jobs get paychecks. The buying power of these cumulative paychecks is tracked as personal income. Personal income transfers the power of employment to the rest of the economy. When personal income increases, the economy tends to expand.

3.       Retail sales: "I go shopping." Buying power from personal income translates into spending power, which can be measured by retail sales. When retail sales increase, the economy tends to expand.

4.       Consumer confidence: "I feel optimistic about the future." Consumer spending represents two-thirds of U.S. economic growth, so knowing how likely consumers are to spend their personal income is an important forward-looking indicator. This is measured by the consumer confidence survey.  The importance of consumer attitudes has never been more evident than in this sluggish recovery. Losing your job, or being worried that you will lose your job, can put a damper on all but the most necessary spending.

5.       Government spending: "Uncle Sam goes shopping." When we get paid, Uncle Sam gets paid via the taxes we pay. If the government wants to spend more than the taxes it collects, it borrows money by selling bonds. We are currently seeing a high level of government spending to try and compensate for the continued lag in consumer spending. Government spending is probably the "squishiest" of all the data points, but in a broad sense, if the current deficit is growing, then the government by definition is spending more than the tax revenue it brings in.

6.       Monetary policy: "Giddy-up vs. whoa" When the economy is firing on all cylinders, there is a danger of overheating, which is a cause of inflation. When the economy is faltering, there is a need to stimulate it. The Federal Reserve creates monetary policy by controlling the supply and cost of capital (interest rate policy).  When the economy appears to be overheating, the Fed will often remove money from the system and increase interest rates. When the economy is sluggish, the Fed will often inject money and lower interest rates.

The first four factors are indicators that show our economy is recovering; however, before you get too excited, it is important to note that these positive indicators are only slightly positive.  These are not the only economic indicators that are important to follow, but also they have an impact on your investments.  There are some housing indicators as well, such as Gross Domestic Product and inflation numbers, which are also important.

Marc Bautis is a Wealth Manager specializing in working with young families as well as retirees and those nearing retirement. He understands that everyone wants to not only protect their principal, but also be sure that their money lasts.  He is committed and proud to deliver independent advice, always in the interest of his clients.

Marc is the creator of the Retirement Fitness Challenge™,  a program designed to be sure his clients enjoy the retirement years as they have always envisioned them.  Marc's program is designed to prevent outliving your money but also to minimize expenses during retirement and find the best time to start taking Social Security benefits. 

Marc is a graduate of Seton Hall University.  He is a Bergen County native, from Lyndhurst, where much of his extended family still resides. He currently lives in Hasbrouck Heights with his wife Katie and Old English Bulldog, Winnie.