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PERSONAL FINANCE : BACK TO BASICS : GOOD INDICATIONS : Indexes Can Help You Read the Economy

June 19, 1988|JONATHAN PETERSON | Times Staff Writer

Inflation is up. The dollar is down. Employment is growing. The trade deficit is shrinking. The Federal Reserve is tightening. Consumers aren't spending. A recession is around the corner. But not this year.

Huh? Every day, it seems, we're bombarded with economic statistics on everything from how vigorously U.S. factories are running to how much money foreigners are spending on American products.

If you don't know how to interpret them, they add up to a confusing, contradictory jumble. But if you do, you can anticipate the direction of inflation, interest rates and other economic forces--a valuable tool in making wise investment and spending decisions.

There's no reason why--with a little homework--you can't take a shot at being your own economic forecaster. Remember: Economists get paid good money to do it, and they're wrong a lot of the time.

But bear in mind that each economic indicator is only one small piece in a giant puzzle. According to the experts, the key to reading the economy is to look for broad trends over time and not put too much faith in any one statistic. The government frequently revises its numbers, anyhow.

"You're dealing with raw material," cautions Norman Robertson, chief economist at Mellon Bank in Pittsburgh. "It's not that complete, and it's not that accurate."

Robertson and others also point out that indicators rise and fall in significance, depending on the economic climate of the time. These days, those who try to fathom the economy are most interested in whether inflation is emerging--a development that would threaten higher interest rates, and, ultimately, a recession. They are looking with interest at America's suddenly booming factory sector. And they are avidly watching the level of consumer spending, a crucial economic engine that has shown signs of tiring out lately.

What then are the signs you should watch for in order to be your own economic seer? Let's look at several:

Unemployment: The unemployment rate, reported by the Labor Department and currently at about 5.5%, gives important insight into the economy's strength for several reasons. Most obviously, it suggests whether industry is creating more or fewer jobs. The implications are powerful: If more Americans are employed, they will have more cash to spend and more confidence in spending it. Analysts also like this figure because it comes out early--on the first Friday of the month--providing a timely snapshot of economic activity the month before.

The report also includes data on the number of new jobs created outside farms. These figures are less quoted than the unemployment rate, but provide a more detailed glimpse of how America's job machine is performing. David M. Jones, chief economist of the Aubrey G. Lanston & Co. securities firm in New York, calls the unemployment report "the single most important batch of statistics for the preceding month."

Inflation: The consumer price index, also reported by the Labor Department, weighs price increases for food, energy and other major categories and is running at an annual rate of between 4% and 5%. But the figure is easily skewed by gyrations in energy and food prices, so the CPI for any one month should be interpreted with caution.

Analysts also look at the producer price index, which measures wholesale prices and is released by the department several days before the CPI. The PPI has breakdowns, for example, of inflation for goods that are just going into the production stream, thus offering a glimpse into the future. Unlike the CPI, however, it does not include prices for service expenditures, so its use is limited.

For more clues to the direction of prices, look up the sensitive materials price index, published in the Journal of Commerce newspaper. It tracks prices of 18 raw materials used by industry. But don't try to be too clever. In a world of tough international competition, it is not entirely clear how much these raw material price hikes are passed on to consumers.

Merchandise trade: This is the monthly report by the Commerce Department on the nation's trade balance. The financial markets often interpret a shrinking deficit as a positive sign of U.S. economic competitiveness, and the dollar may strengthen as a result. A growing deficit has the opposite effect. In particular, it disturbs financial markets because a weakening dollar causes upward pressure on interest rates.

But the number is notorious for bouncing around from month to month, sometimes obscuring long-term trends. Most analysts believe that the trade deficit is now shrinking, even though disappointing future reports are possible. In fact, many investors who previously bemoaned the trade gap are worried now that U.S. exports are growing too swiftly, a harbinger of inflation.

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