Interpreting Indicators

By Andre Jackson
May 1, 2009

Helping readers and viewers accurately take the economy’s temperature is a vital role for journalists as millions of people in the U.S. and around the world search for trustworthy signs that we’ve hit bottom and are starting to power out of this stiff recession.

Last month, we examined how measuring the economy’s health is a lot more complex than just looking at which direction the Dow Jones Industrial Average’s tilted on a given day.

A more comprehensive and accurate reading of the economy involves what mathematicians call a multivariate equation. Since I’m a journalist and higher math isn’t a strong suit of mine, I prefer to think in simpler terms. Picture a playground seesaw sitting still and balanced at midpoint. Now apply a kid to the seesaw and watch its occupied end flop to earth, leaving the empty half pointed skyward. You get the picture.

Next, let’s replace the kid with economic indicators of varying weight and let the seesaw itself represent the overall economy. Slap a plus arrow representing growth on one corner. Put a minus sign for negative growth at the opposite end. Now you’ve got a mental tool to weigh the economy.

Like a seesaw that’s in use, rarely does the economy sit in static, perfect equilibrium, balanced between growth and decline. An economy’s much more dynamic, usually moving - shooting upward, sliding downward or somewhere in between.

Visualize stacking more than one weight (economic indicators in this case) on each end of the seesaw at times, and you’ve completed this mental exercise.

Now let’s move on to a few non-market indicators that help journalists assess economic health. The indicators below are listed in no order of importance, but they each can provide valuable insights into how well the economy’s machinery is running.

Federal Reserve interest rates

Next to the Dow average, among the most watched bellwethers are the Federal Reserve’s eight yearly meetings of its Federal Open Market Committee. The FOMC are the folks who tweak and fine-tune or, more rarely, slash and burn the key Federal Funds rate. Fed Funds is an interest rate used by banks and other “depository institutions” to set their cost of borrowing money, often on an overnight basis. Bankrate.com calls Fed Funds the “primary tool that the Federal Open Market Committee uses to influence interest rates and the economy.” That’s no exaggeration, given that lower or higher rates can, respectively, either ease or increase friction in credit markets by affecting the cost and ease of borrowing.

Fed Funds is important for other reasons. Among them is that the better understood “prime rate” is derived from it. The prime has long been critical to the “American Way of Debt,” since it’s used as a benchmark to set credit card and home equity interest rates – two key levers used by millions of households to help finance their lifestyles.

The FOMC’s meetings are usually preceded by a run-up of speculation and chatter as to whether the body will raise rates, lower them or stand pat. Each action says something different about U.S. economic strength. After the FOMC announces its rate decisions, markets can react calmly – or wildly – to the news, depending on how closely the action aligned with predictions. The release of FOMC minutes sometime after its meetings usually leads to another round of analysis as market-watchers tear into the notes in search of clues as to the FOMC’s thinking.

To recap, there’s the run-up, the announced result and meeting notes that show up later. That makes for three solid news pegs for good stories arising from one meeting. Who could ask for more?

GDP

You’ve no doubt heard the acronym “GDP” used frequently by pundits and economists alike. Many of us can recite by heart, more or less, the classic definition: The value of all goods and services produced by an economy.

That description’s accurate as far as it goes, yet there’s a bit more worth knowing about GDP. The website www.investorwords.com defines the rest of the GDP story well: “The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.”

If GDP’s growing, it’s a good sign that the economic motor is running fairly smoothly, with companies making investments, hiring workers and producing goods. More importantly, consumers and companies are probably buying products and services.

Negative GDP points toward an economy that’s contracting in at least some places, with firms and buyers starting to tighten their belts. Household cupboards may grow more bare as people cut back purchases; companies likewise cut production to reduce growing inventories. Layoffs rise as businesses shed costs. The spiral can start to feed upon itself, worsening matters even more.

It’s easy to see why GDP is an important, if broad-brush, measure of economic health.

GDP is not the end, however. There are several other indices and indicators that bear watching on your business journalist radar screen. News permitting, we’ll tackle those in the next installment.

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Copyright © 2009 Donald W. Reynolds National Center for Business Journalism