Government Reports for Stock Investors to Watch
The best stock analysts look at economic reports from both private and government sources for investing information. Alas, government reports aren’t totally reliable because errors and/or purposeful fudging happen and usually have a political component to them. A good way to round out your economic analysis is to compare government data from other sources that scrutinize the same data, such as Shadow Government Statistics.
Gross domestic product (GDP), which measures a nation’s total output of goods and services for the quarter, is considered the broadest measure of economic activity. Although the U.S. GDP is measured in dollars (as of 2012, annual GDP is in the ballpark of $14 trillion), it’s usually quoted as a percentage. Because the GDP is an important overall barometer of the economy, the number should be a positive one.
The report on the GDP is released quarterly by the U.S. Department of Commerce.
You should regularly monitor the GDP along with economic data that relates directly to your stock portfolio. The following list gives some general guidelines for evaluating the GDP:
More than 3 percent: This number indicates strong growth and bodes well for stocks. At 5 percent or higher, the economy is sizzling!
1 to 3 percent: This figure indicates moderate growth and can occur either as the economy is rebounding from a recession or as it’s slowing down from a previously strong period.
0 percent or negative (as low as –3 percent): This number isn’t good and indicates that the economy either isn’t growing or is actually shrinking a bit. A negative GDP is considered recessionary (meaning that the economy’s growth is receding).
Less than –3 percent: A GDP this low indicates a very difficult period for the economy. A GDP less than –3 percent, especially for two or more quarters, indicates a serious recession or possibly a depression.
Looking at a single quarter isn’t that useful. Track the GDP over many consecutive quarters to see which way the general economy is trending. If it’s better (or worse), then ask yourself to what extent it has changed. Is it dramatically better (or worse) than the quarter before? Is the economy showing steady growth, or is it slowing? If several quarters show solid growth, the overall economy is generally bullish.
Higher economic growth typically translates into better sales and profits for companies, which in turn bodes well for their stocks.
Traditionally, if two or more consecutive quarters show negative growth (an indication that economic output is shrinking), the economy is considered to be in a recession. A recession can be a painful necessity; it usually occurs when the economy can’t absorb the total amount of goods being produced because of too much excess production. A bear market in stocks usually accompanies a recession.
The GDP is just a rough estimate at best. It can’t possibly calculate all the factors that go into economic growth. For example, crime has a negative effect on economic growth, but it’s not reflected in the GDP. Still, most economists agree that the GDP provides an adequate ballpark snapshot of the overall economy’s progress.
The National Unemployment Report is provided by the Bureau of Labor Statistics. It gives investors a snapshot of the health and productivity of the economy.
The Consumer Price Index
The Consumer Price Index (CPI) is a statistic that tracks the prices of a representative basket of goods and services monthly. This statistic, which is also computed by the Bureau of Labor Statistics, is meant to track price inflation.
Inflation is the expansion of the money supply. This is referred to as monetary inflation, and it usually leads to price inflation, which means that the price of goods and services rises. Inflation, therefore, is not the price of goods and services going up; it’s actually the price or value of money going down.
Investors should pay attention to the CPI because a low-inflation environment is generally good for stocks (and bonds, too), whereas high inflation is generally more favorable for sectors such as commodities and precious metals.