Economy & Investing

How macroeconomic measures are used and what influences they have are determined by the data itself as well as when and how it was gathered and distributed. Causes of macro-economic measures and their effects on investment climate are all defined by historical observations. Factors that develop outside historic norms, such as the very long period of economic growth in the United States in the 1990s, can confuse investors. In these cases, cause and effect relationships may change or even reverse. For example, the strong economic factors of the 1990s eventually came to be viewed as inflationary, even though little measurable inflation was occurring at the same time.

Value of all production within a country is known as Gross Domestic Product (GDP). GDP measures products for final consumption or investment. Only the flow of goods and services produced by labor and property within the country itself are included. Growth in the GDP has a positive effect on investment markets, because investors expect rising profits.

High inflation, on the other hand, lowers the purchasing power of the home currency. This in turn lowers investors' valuation of future earnings, thereby lowering price/earnings (PE) ratios and prices of equity investments.

Inflation is measured by the following two indexes:

%u2022 The Consumer Price Index (CPI). The CPI measures the average cost of specific goods and services consumed by an urban family. As a trailing indicator, CPI looks backward to tell investors where prices were.

%u2022 The Producer Price Index (PPI). The PPI measures the price changes of goods at the wholesale level. The PPI is both a trailing and a leading indicator. While it tells investors what businesses paid for supplies, it also signals future costs to consumers. Other leading indicators include prices for raw materials, the number of unemployment insurance claims filed, and new orders for manufactured goods.

Macroeconomists and investors also pay close attention to unemployment rates, consumer spending, and industrial production. An increase in unemployment signals an economic slowdown, which is typically a negative for investing. Increases in consumer spending and industrial production have the opposite effect. These are indicators of a strong economy and a healthy investment climate.