Given that commercial TV economists seem to disagree, what should the average investor do? What should a recovering economy look like? Watch these economic indicators for signs of recovery.
It's hard to say the economy is recovering when people aren't going back to work. A "jobless recovery" occurs when the economy grows enough to restart businesses but not enough to encourage new workers.
For the most part, however, investors are right to link the improving economy with people returning to the labor market. As a result, outsiders tend to take the stated unemployment rate very seriously. However, keep in mind that unemployment data isn't always reliable in the early stages of a recovery; a quirk of the method excludes those who have given up looking for work.
For better or worse, consumer spending drives the global economy. Therefore, it is impossible to foresee a recovery without a recovery in consumer spending. Consumers may realize that they should save more with less in the long run, but this restructuring won't happen overnight. When consumers open their wallets, it's a sign of recovery.
It may be a monument to the power of optimistic thinking, but sentiment indicators like the Michigan Consumer Confidence Index and the Consumer Confidence Index (CCI) seem to mostly match reality. These polls ask people how they feel about the near-term outlook for the economy and their personal or family prospects.
At the end of the day, it feels like a self-fulfilling prophecy; when people are constantly reminded of how bad things are, they're more likely to be frugal with their money. In turn, lower spending will exacerbate the economic downturn. On the other hand, more optimistic people are more likely to spend money, start or grow small businesses, and engage in other activities that promote economic growth.
Consumer confidence in the economy is important, but it needs to be matched by confidence and growth in the business sector. The Purchasing Managers' Index (PMI), which checks whether businesses are winning new orders, boosting production levels, delivering on time from suppliers, and expanding inventories and employment, are indicators of a recovery.
While public companies don't rely entirely on banks for growth, most small, non-state companies do. Small businesses cannot thrive until banks make new loans, and without this expansion, job creation and a steady recovery are impossible.
The Federal Reserve regularly releases data on bank lending activity, and investors should check the Thomson Reuters/PayNet Small Business Lending Index to see if small businesses are seeking (and obtaining) capital for expansion.
Shipping activity is more difficult to interpret than other metrics. However, the basic concept is simple: since most people buy goods "elsewhere", all economic activity is linked to the movement of goods across the continent. The American Trucking Association's Truck Tonnage Index and Cass Freight Index are two notable indices in this space. (The indicator has its critics, but it can provide information about economic development and productivity.)