9 Economic Indicators You Need to Follow

Time certainly flies when you're having fun -- and much fun was to be had this year, with all three major market indexes returning well more than 20% year to date!

In order to keep this joyous spirit going throughout the next two weeks leading up to Christmas, I've decided to once again count down this holiday season with my own Foolish rendition of the "12 Foolish Days of Christmas." Instead of turtle doves, French hens, and partridges invading pear trees, you'll be privy to high-growth stock ideas, game-changing innovations from a wealth of industries, unique ways to fuel your retirement account, and so on.

Over the previous three days of our Foolish holiday kickoff, we've counted down the:

Now it's time to move the countdown lower by a notch!

"On the 9th day of [Foolish] Christmas my true love gave to me..."

Nine economic indicators you need to know about!
Every week there are dozens of economic reports and sentiment readings to sift through, and, frankly, not all of them are as important as others. With some reports divvied out weekly, monthly, and quarterly, it pays to know which are the most important for the do-it-yourself investor. In the Foolish spirit of giving, I'll share with you the nine economic reports, readings, and meetings that I look to most to help me make my investment decisions.

1. FOMC meetings
Frequency: every six weeks
The reason you need to have your eyes peeled for the Federal Open Market Committee meeting every six weeks is that its decisions usually determine where interest rates will head next. The FOMC specifically sets the federal funds target rate, which is the rate banks charge one another for overnight borrowing. This rate influences lending rates that banks charge for everything from mortgages to credit cards, so you can see how understanding what the FOMC is thinking can be critical to how the economy performs (i.e., lower lending rates lead to expansive enterprise and borrowing activity, while higher rates reduce borrowing).

The FOMC is also responsible for the maintenance of the ongoing monthly economic stimulus known as quantitative easing, which involves buying $85 billion in a combination of long-term U.S. Treasury and mortgage-backed security purchases. The purchase of long-term Treasuries, especially, has been a driving force in keeping interest rates low.

2. U.S. GDP report
Frequency: quarterly, via three estimates
Although it's an indicator that looks in the rearview mirror -- and the market generally prefers to look toward what's ahead -- the GDP report is a crucial piece of evidence used by the FOMC to help determine the next course of action with regard to the federal funds target rate and quantitative easing. The U.S. gross domestic product report is released quarterly (with two estimates and a final figure) and gives investors and Wall Street an indication of the health of the U.S. economy. As an example, the second estimate for third-quarter U.S. GDP just came in at 3.6%, which was up 0.8% from the advance estimate of 2.8%. We're still waiting for the final figure for the third quarter.

3. Initial weekly jobless claims
Frequency: weekly
You'll notice I chose the Department of Labor's initial weekly jobless claims report as opposed to the monthly nonfarm payroll report here. I find more value in understanding how the jobs market is responding week by week via unemployed insurance claims than I do in waiting a full month for a lagging indicator.

The initial weekly jobless-claims data is important because it gives us an inside look at how many people, on a seasonally adjusted basis, are filing for unemployment insurance. In other words, we can get almost coinciding data on unemployment and economic performance by reviewing this weekly report. I would certainly urge you not to react too strongly to this short-term indicator, because it can sometimes have wild and unexpected vacillations. But it's a fairly steady indicator when looked at over multiple weeks, and it's my go-to indicator for assessing employment health.

4. Beige Book release
Frequency: every six weeks
The release of the Beige Book occurs about two weeks before each FOMC meeting and often supplies immense insight into how various Federal Reserve governors view the health of the economy. Each Federal Reserve Bank prepares a survey for its contacts to complete, which helps establish the health of various indicators throughout specific regions of the country. These data points then help the FOMC determine whether to adjust the federal funds target rate or quantitative easing.

Source: Tshein, Flickr.

5. U.S. retail sales
Frequency: monthly
Since more than two-thirds of U.S. GDP is reliant on personal consumption, paying attention to how quickly consumer purchases are growing, or slowing, is extremely important. The monthly U.S. retail sales figure can be viewed a number of ways, including as a figure that excludes auto sales, which because of their high sticker price can skew the results one way or the other. My preference is to view this figure sans auto sales because then we get a better indicator of how food, beverage, and other retail product and catalog sales are performing. If you're invested in any sort of consumer goods or industrial company, this is a report you certainly want to watch closely.

6. Consumer Price Index
Frequency: monthly
In addition to understanding how much the consumer is purchasing relative to the previous month and year, it's also important to understand how inflation (the rising cost of goods) is affecting the consumer. If inflation is rising rapidly, then consumers' buying power is decreased. Conversely, if inflation is running well below average -- as it is now -- then consumers are able to purchase more if they have a steadily improving income stream.

The Consumer Price Index, which is released monthly, gives us the best possible insight on the price consumers are paying for a consistent basket of goods on a month-over-month basis. The data collected helps determine price action across some 200 different item categories.

7. Producer Price Index
Frequency: monthly
The other side of the equation to the CPI is the Producer Price Index, which is the business-equivalent measure of inflation. The PPI measures the cost of goods that businesses purchase and sell at the wholesale level prior to their retail markup. The PPI report aggregates prices from practically all goods-producing sectors and some 25,000-plus establishments to give investors an idea of how costs are reacting from the enterprise side of the business. If the PPI is rising rapidly, for example, we might expect higher costs to be passed along to consumers, or for businesses to suffer from lower margins as they stick to their current prices.

8. University of Michigan Consumer Sentiment Index
Frequency: monthly
Not to beat a dead horse, but with consumer spending being the primary economic driver of GDP, understanding how those consumers feel about the economy is extremely important to me as an investor. Released monthly, the University of Michigan Consumer Sentiment Index provides investors a way to see how a sampling of Americans across the U.S. feels about the short-term and long-term economy, as well as their own financial situation. Sentiment is what ultimately determines purchasing habits, and while this survey can be as small as 500 people across the U.S., it is often a surprisingly accurate current indicator of retail enthusiasm. It's another can't-miss report for anyone who dabbles in consumer goods stocks.

9. U.S. Treasury budget announcement
Frequency: monthly
Last, but certainly not least, it's worth paying close attention to the monthly release of the U.S. budget figure, which in recent years is almost always a deficit. The reason this often-overlooked figure is worth keeping an eye on has to do with the sequester cuts intended to reduce federal spending across a number of sectors of the U.S. economy. Put bluntly, the nation's debt growth is on an unsustainable course higher and the U.S. federal budget deficit needs to shrink soon if we have any hope of paying down our monstrous debt load. Watch this figure for monthly cues as to how effectively the sequester cuts are working.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 13, 2013, at 1:53 PM, SkepikI wrote:

    Sean: I suggest you reassess the value and accuracy of some of the statistics you follow. Just one set of comments on CPI causes me to be dubious about the depth of your evaluations:

    <The Consumer Price Index, which is released monthly, gives us the best possible insight on the price consumers are paying for a consistent basket of goods on a month-over-month basis.>

    Since this information is not attempted in any other more accurate way, I suppose "best possible insight" might be considered technically accurate. However, mistaking CPI for good accurate valuable information as a result of this would be a mistake. I know this because I and my family were data sources for BLS for 3 years in the mid 90's and I do not think BLS has changed their data collection approach since- please correct me if my facts are wrong nearly 20 years later.

    When the BLS surveyor came to our house and asked many different questions about prices, my well organized spouse would pull out her receipts and budget and looked up the accurate data to address his questions. He remarked on this, saying something along the lines of - Wow, you have really good information and are more organized than any of my other sources. not an exact quote but close.... The next part is burned in my brain and IS an exact quote that I will never forget: When I asked him "Well, how does everyone else report this information to you?" he had the decency to look mildly embarrassed, and said "ummm well, ..most just guess"

    While I cannot tell you for a fact that nothing has changed in 20 years, my experience tells me if anything its gotten worse.

    SOME of your measures above are not actual statistics but that may not matter at all, as for example the FOMC uses some "data" to make decisions and what matters is the decision not whether the data is good or not......

    But if you've vetted the statistics you look at no better than CPI, perhaps because you have not looked at HOW they get generated, its questionable if they can be useful for any purpose at all. Of course perhaps your philosophy is that thousands (millions) of others are equally looking and depending on the "data?" so whatever mistakes are made ripple through the investing picture no matter if they are correct or not....

    For me, its much better and your article would be much more useful had you identified how close to the actual results a given data point is. For the record, CPI because of how its collected, seems only useful for trends. I estimate its "standard error" at something over + - 15% due to its methodology.

  • Report this Comment On December 13, 2013, at 1:54 PM, SkepikI wrote:

    ^ 15% may be too conservative, I could make a pretty good case for 50%

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