Question

Go to a financial news source (a web search will pull this up) to find out the status of the leading economic indicators at this time. Make note of your findings.

How does the information inform you as an investor? Share with your classmates the economic indicator you think might be the most important for investing decisions, and why you think this indicator is important.

Answer 1

Gross domestic product (GDP) is a common measure of the value of output. • Inflation measures the currency’s purchasing power. • Unemployment measures the extent to which the economy creates opportunities for participation. • Interest rates affect the futurevalue of money are the most important indicators of the health of the economy.The index of leading economic indicators includes the following: 1. The length of the average workweek (in hours) 2. Initial weekly claims for unemployment compensation 3.New orders placed with manufacturers 4. The percentage of companies receiving slower deliveries from suppliers (vendor performance) 5. Contracts and orders for new plants and equipment 6. Permits for new housing starts 7. The interest rate spread (difference) between the ten-year Treasury bond and the Federal Reserve Funds rate, the “overnight rate” that banks use to lend to each other 8. The index of consumer expectations (the University of Michigan Index) 9. Change in the value of the index of stock prices (for 500 common stocks) 10. Change in the money supply. All these measures indicate how productive the economy is, how successful it is at creating jobs and incomes, and how much benefit it can create for consumers.

As an investor, a decline in the leading indicators for three consecutive months is thoughtto be a strong sign that the economy is in a downturn or even heading toward a recession. This would of course, dissuade me from investing further as the risks exceed returns during this period.