Nobody likes to think about the economy until there's a problem. Unfortunately, if you own a business or if you have any investments (retirement counts!), you have to pay attention to economic trends. Paying attention to economic trends can help you make better-informed decisions about your business and about your investments, and if you aren't paying attention you could find yourself in trouble, and fast!
What are the major economic indicators you should be looking at?
The federal government has been tracking housing starts since 1959. This is the number of new houses that begin construction in a given time period, and it has historically been an indicator of the strength or weakness of the overall economy. Housing starts could indicate that consumers are confident in the market or that there may be a rise in purchases of other consumer goods, such as lawnmowers and refrigerators.
Consumer financial stress is another major economic indicator. When consumers face serious financial stress, they are less likely to spend on things they don't absolutely need. If you're in the high-end restaurant business or the pool business, take note -- consumers may not have disposable income if the consumer financial stress index shows high-debt loads.
Housing activity is another major indicator of the overall direction of the economy. If consumers are under a great deal of financial stress - when there's high unemployment and high debt, for example - they are going to stay in their homes longer. When more homes are being bought and sold, that is an indicator that the economy is on an upswing.
Bankruptcy is an obvious financial indicator. When there are more bankruptcies, there is a good chance the economy is in a downturn. Foreclosures are also an indicator of overall consumer financial stress.
But what if there's conflicting information from economic indices?
It takes an economist to truly be able to interpret what is going on in the economy at any given time, and even at times they can be wrong. But there are other economic indices that can give you more information about why a particular trend is happening.
Enter law indices. Legal data from the last 15 years can be used as an additional clue as to why the economy is headed one way or another, or why two economic indices may be in conflict with each other. Tracking legal intakes can give you a clearer picture of who is filing for bankruptcy or who is entering foreclosure and why - not just that bankruptcies and foreclosures are going up.
Yeah, but why should you care?
Imagine you are thinking of opening a steakhouse. Not just any steakhouse, but the biggest, fanciest steakhouse in the whole town. Now restaurants are already a risky undertaking - they have a great deal of overhead going in, and they can take years to turn a profit. Now imagine you open the newspaper to find that housing starts are down. You turn the page to see that unemployment is up, and so is consumer financial stress. Does this sound like a great time to open the fanciest steakhouse in town? Probably not. Maybe this is time to open a diner or a food truck instead.
Now imagine you are planning to open a big fancy steakhouse, and you open the newspaper to find that unemployment is down along with consumer financial stress, and housing starts are way up, particularly in your part of the country. Now you have a pretty good indicator that people have a little extra cash to spend these days, and maybe opening that big fancy steakhouse is a pretty great idea after all.
The same lessons can be applied to your financial portfolio. Thinking about buying stock in a home improvement store? How are housing starts and housing activity looking lately? Thinking about selling off that old stock in the lawn mower company? Maybe housing activity is up and a lot more people are going to be buying lawn mowers this summer.
Making informed decisions can keep you in the game longer.
There are a lot of reasons why businesses fail. Making better decisions about yours can keep you in the game longer. Paying attention to economic indicators can help you make well- informed decisions about your business and about managing your money, and paying attention to nontraditional economic indices like law indices can help you to interpret the data, particularly when the data conflict with each other. Learn more about the importance of paying attention to legal indices from this infographic from Legal Shield.