Usually, if something looks too good to be true, it probably is. Unless you’re describing the 1997 economy.
“We have been in an expanding economy with relatively tame inflation, which is the best of both worlds,” says David Lereah, senior economist for the Washington, D.C.-based Mortgage Bankers Association of America and author of a book called “Staying Ahead: Rule of Thumb Strategies for Achieving Financing Success in Today’s Economy”.
“The economy is so strong, and we have an unemployment rate of 4.9 percent. Because things look so good, there’s anxiety in the financial world. We’re not accustomed to this. History teaches us that an economy growing at a robust rate with basically full employment translates into heavy doses of inflation,” Lereah explains. “But that’s not happening.”
Like Lereah, Federal Bank Chairman Alan Greenspan and other economists around the country have their eyes fixed on different pieces of economic news that are released like clockwork at different times of the week and month. Each piece of information is an important piece of the economic puzzle, and tells economists where the economy is heading.
“The leading economic indicators also give us a clue as to what Greenspan will do about raising interest rates. At six week intervals, the Federal Open Markets Committee meets to decide whether to raise, lower, or leave standing government discount interest rates. And where those interest rates go have a direct impact on households and consumers,” adds Lereah.
So what are the most important leading economic indicators, and what can you learn from watching them?
- Retail Sales. “Retail sales numbers are extremely important because they tell you if consumers are spending money and what they’re spending money on. It tracks things from homes to automobiles to refrigerators,” says Lereah. The report is released during the second week of every month.
“This is an important report now, but it wasn’t a year ago because the economy was growing because the manufacturing sector was expanding. Now, it’s growing because consumers are spending money,” he notes.
-
Unemployment Report. Does everyone have a job who wants one? “This is the most critical report over the past ten years. Everyone looks to it because it’s the first report of the month. It tells us about gains and losses in the employment sector, gives us average hourly earnings numbers, tells us whether people are making more or less, and gives us other clues about inflation and production,” Lereah says. The report is released on the first Friday of every month.
-
Housing Starts. This report measures the numbers of building permits pulled by developers to build new houses. It’s critical, Lereah says, because the housing sector is the most sensitive part of the economy. Whether the housing starts number rises or falls tells us about how interest rates are working in the economy. If housing starts slows down, other sectors eventually slow down.
When starts go down, that might indicate that home sales are weak. If home sales are weak, developers won’t build homes, and employment and income levels will go down. “If you don’t buy a home, you won’t decorate it, and buy furniture for it, and other items,” he says. If you don’t build a home, you don’t need water mains, electrical fixtures, or a refrigerator. The report is released on the third Tuesday of the month.
-
National Association of Purchasing Managers Index (NAPM) tells you if the manufacturing sector is expanding or contracting. “We look at that because manufacturing is a big part of the economy. If that’s expanding, industrial production will go up and business inventories will go up.” The report is released early during the second week of the month.
-
The Producer Price Index (PPI) or Consumer Price Index (CPI). These reports also give economists a sense of where inflation is heading. A fixed basket of consumer goods (for the CPI) measures how much it costs to buy fruit, gas, a house, a mortgage, etc. The PPI measures the cost of production of other goods and services. The PPI and CPI are released during the second and third weeks of the month, respectively.
Lereah says bond traders spend their lives trading in anticipation or reacting to each report.
“I used to work on the trading floor and I had to get up early to tell them my predictions for each report. They would trade on my predictions, and when the report was released, I’d yell out how interest rates would react,” he said.
How the bond market reacts to these reports directly relates to whether interest rates go up or down. And, when interest rates go up or down, it directly affects what you, the consumer, will pay for a mortgage.
Should you be concerned about where the economy is when buying a home or getting a loan? Lereah thinks it certainly helps to pay some attention to the numbers.
“Don’t pay attention to the pundits and analysts. But if you have some economic intelligence out there, you could save $18 to $50 per month on your mortgage by getting in at the right time,” he adds.
May 12, 1997.
Leave A Comment