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Keep an Economic Scorecard

Tracking the relevant data can help you explain complex issues to your clients.

Helen Modly, 04/02/2009

The cable news networks have us ricocheting from doom and gloom to glimmers of hope, only to be slammed against doom and gloom again. The economic indicators seem to be swirling instead of trending. Create an economic scorecard for your clients to help them understand the most important indicators and what they mean to investors.

Since the explosion of 24/7 cable network news and the incessant coverage of all things financial, your clients have been bombarded with economic terms and statistics that only PhD's use in everyday conversation. Not only are we crushed by the sheer volume of data, the various talking heads draw vastly different conclusions from the same set of ever-changing numbers. How could anyone make any sense of this?

Yes, we are in uncharted waters. Yes, many different forces came together to create a perfect storm of economic collapse. Whether this could have been predicted or prevented is not really the issue for your clients now. Too many of them have fled to the sidelines to wait it out. We understand their anxiety and fear, even if we still recommend that investors stay the course. Now their problem is how to know when it is "safe" to get back in the water.

The Lizards Are Winning
Our intellectual brains tell us that the market hasn't been this "safe" in a decade, if safe means that there is more upside potential than downside. Funny, your clients probably don't feel that way late at night. An increasing number of investors are responding not with their highly developed cerebral cortexes, but with what Bob Veres so aptly described as our lizard brain. This reptilian, preverbal remnant causes us to react to what we perceive as danger with a flight or fight response. When investors can't comfortably assess the danger and don't know how to evaluate whether it is getting better or worse, it is not surprising that so many have responded by fleeing equities for the perceived safety of cash.

Let's give them an understandable scorecard so they can begin to make sense of the news.

What's an 'Economy' Anyway?
Loosely stated, an economy is all the activities involved with the production and distribution of goods and services in a geographic area. There are many moving pieces, some more important than others. For investors, there are six primary factors to understand:

* Employment
* Personal Income
* Retail Sales
* Consumer Confidence
* Government Spending
* Monetary Policy

Employment:  'I Have a Job'
The ability to earn a stream of income for decades to come is quickly becoming a highly prized asset. For many people, it is arguably their largest economic asset. For this reason, employment is the single most important variable in the health of any economy. Employment is the engine that drives economies. It provides the monetary source (employee compensation) that keeps all the other parts moving. We evaluate employment by measuring its inverse, unemployment. When unemployment is low, economies expand. Economies contract when unemployment increases. Employment statistics can be found at The Bureau of Labor Statistics website, www.bls.gov.

Personal Income: 'I Get Paid'
Employed consumers get paychecks. The buying power of these cumulative paychecks is tracked as personal income. Personal income transfers the power of employment to the rest of the economy. When personal income increases, the economy tends to expand. Visit the Bureau of Economic Analysis at www.bea.gov.

Retail Sales: 'I Go Shopping'
Buying power from personal income translates into spending power which can be measured by retail sales. When retail sales increase, the economy tends to expand. This information, along with many other economic indicators can be found on the website, www.economicindicators.gov.

Consumer Confidence: 'I Feel Optimistic about the Future'
Consumer spending represents 2/3 of U.S. Economic growth, so knowing how likely consumers are to spend their personal income is an important forward-looking indicator. This is measured by the consumer confidence survey. The importance of consumer attitudes has never been more evident than in this downturn when the screeching halt of consumer spending has caused our economic engine to sputter precariously. Visit www.conference-board.org for monthly data.

Government Spending: 'Uncle Sam Goes Shopping'
When we get paid, Uncle Sam gets paid with our taxes. If the government wants to spend more than that, it borrows money by selling bonds. We are currently seeing an unprecedented level of government spending (and borrowing) to compensate for the steep decline in consumer spending. PAGEBREAK

Monetary Policy: 'Giddy-up Versus Whoa'
When the economy is firing on all cylinders, there is a danger of overheating which is a cause of inflation. When the economy is faltering, as it is now, there is a need to stimulate it. The Federal Reserve creates monetary policy by controlling the supply and cost of capital (interest rate policy). When the economy appears to be overheating, the Fed will remove money from the system and increase interest rates. When the economy is sluggish, the Fed will inject money (as it is doing now), and lower interest rates. More information on monetary policy can be found at www.federalreserve.gov.

The change in these six factors so far for 2009:

Employment (Up/Down)
January 2009: Down
February 2009: Down

Personal Income (Up/Down)
January 2009: Down
February 2009: Down

Retail Sales (Up/Down)
January 2009: Up slightly 
February 2009: Down 

Consumer Confidence (Up/Down)
January 2009: Down 
February 2009: Down

Government Spending ($In/$Out)
January 2009: $In 
February 2009: $In 
Monetary Policy ($In/$Out)
January 2009: $In
February 2009: $In

The first four factors indicate an economy in trouble. The two government factors show that the government is responding to a contracting economy. These six factors are not the only indicators to watch. Housing starts, home sales, durable goods orders, gross domestic product, and inflation are other important variables. Housing statistics are particularly important now since the housing crisis is at the center of our current economic problems. Another good source of economic data, particularly housing data, is the Center for Regional Analysis at George Mason University.

I would encourage you and your clients to post a scorecard like this one on the fridge and update it monthly. No one indicator can predict the future, but positive trends developing in one or more factors may encourage clients to return to their long-term investment plans. At least they will be better able to filter the noise coming from the TV.

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