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Can you explain economic indicators and how they affect me?

There's an old saying in the financial world: "Nobody rings a bell at the top of the market." Since a bell doesn't toll, economists assess the market and the underlying economy through a variety of statistical indicators.

Measuring economic activity is basically a matter of assessing supply and demand through numeric values. There are literally hundreds of statistical numbers that are crunched each month to indicate movement in a variety of economic areas - everything from housing starts to unemployment, to mortgage rates, to consumer spending. Since no single statistical number can give a total picture of the economic health of a country such as Canada or the U.S., economists make assumptions based on the sophisticated hodgepodge of data. Some of the key economic indicators include:

Gross Domestic Product (GDP)   . GDP measures the amount of goods and services produced by a country and is one of the most sought after numbers. Because it reflects the economy so closely, it's considered a key indicator of the economic pulse of a country. The GDP number is a comparison tool, not an isolated number. People look for a change in GDP over a period of time, whether month-to-month, quarter-to-quarter or year-to-year. If the GDP number is up, it indicates a growth in production and visa versa if the number has dropped over a period of time. Consumers play a vital role with regard to the GDP, accounting for half to two-thirds of the GDP. Generally, if consumers' incomes are up, they will save some of that income and spend the rest. Both saving and spending creates a domino effect. What consumers spend becomes income for someone else, and what they save finances investments, which supports future businesses, income and consumption.

Retail Sales   This economic indicator, released each month, is an estimate of consumer spending in durable and non-durable items. In other words, it measures the strength or weakness in retail demand. Recently, the numbers in retail sales in Canada, including automobile sales, was up, indicating that people are spending more. Retail sales statistics are also given that exclude automobile sales. A growth in retail sales is positive for the economy and indicates consumer confidence.

Unemployment rate   This is another sought after number that is released every month. As the name implies, it measures the percentage of the work force that is not working. If jobs are growing, it indicates the economy is growing.

Purchasing Managers Survey   This number shifts from a consumer focus to the producer level. It surveys five different categories of activity - new orders, production, deliveries, inventory, and employment figures measuring the increase or decrease in activity from the previous month. Numbers over 50% indicate an expansion in production, and numbers under 50% indicate a contraction in production. Recent numbers have been under 50%, indicating a slower economy.

Key economic indicator that measures inflation: Consumer Price Index (CPI)   Another popular statistic used by economists is the CPI. Basically it's a measure of the price you pay for a fixed basket of goods and services. Two numbers are given for the CPI: a core number that doesn't include food and energy products in your basket and a number that does include food and energy items. Policy makers tend to look at the core number since food and energy products are subject to uncontrollable factors such as the weather and natural gas prices.

Economic controls through interest rates

The Bank of Canada and its U.S. equivalent, the U.S. Federal Reserve, look closely at economic indicators and adjust monetary policies to maintain economic stability. They strive for gradual movements in the business cycle, trying to protect the economy from dramatic swings. The Bank of Canada and the U.S. Federal Reserve try to stabilize the economy through gradual interest rate changes. If the economy is expanding too quickly, for example, the policy makers raise interest rates to slow down activity, or lower interest rates when growth is needed. Make no mistake, these gradual interest-rate changes, however small, affect everything from mortgage rates, to stock market prices, to automobile sales, to the pace of tee-shirt sales at The Gap. Over the past year, the dramatic drop in the high-tech market and its subsequent effect on the economy, not to mention investors, has triggered interest-rate cuts in both Canada and the U.S. In an attempt to bolster consumer confidence, stimulate the economy, and ward off a recession, the well-publicized U.S. Federal Reserve chairman, Alan Greenspan has cut interest rates significantly several times. Canada has followed suit. While Canada's economy is considered strong in the long term, the affect of U.S. monetary policies can have significant repercussions in Canada as well. Lack of consumer confidence in the U.S., for instance, has reverberated through our technology industries such as Nortel Networks Corp., driving our Nortel-heavy portfolios down significantly.

Bookmarks

The Atlas of Economic Indicators by W. Stansbury Carnes and Stephen D. Slifer, published by HarperCollins, New York, 1991. The Economist's Guide to Economic Indicators: Making Sense of Economics by The Economist Books, London, England, published by Profile Books Ltd., London, England, 1997 Statistics Canada web site: www.statcan.ca/start.html. Excellent access to news of statistical releases and analysis.