Trade The Journey

Trade The Journey

Keeping Track of Consumer Confidence

I’d say that people are satisfied with the way the economy is moving along. What could go wrong? Well the fact that we have had the longest bull market in history is a signal you’d say to the good times. Everyone is enjoying the good times of low unemployment and companies tripping over themselves to hand out jobs.

Until recently, I was quite unsure of how the economy works. I understood that bad times were approaching, or maybe that my job in a particular industry wasn’t needed anymore. But I knew nothing of the underlying factors that contributed to job loss, nor did I know of any signs to watch for. Good times seldom last forever and bad times in hindsight make exits easy to predict in the past.  When I first began learning about the economy, it took a while for me to grasp the concepts and I still consider myself a pupil to a invisible teacher.

So why would I have a graph of consumer confidence placed above?  Consumer confidence should be at the top of the checklist when gauging the health of the economy. The reason for this  is that we, the people, own most of the debt in the United States close to 70%. Our economy is heavily reliant on people spending money in the economy which is why we have become a nation of consumers and our savings rate is extremely low.

We don’t see the value in saving money when our desires need to be met now and for this reason we have also been reliant on debt. For these reasons it is extremely important for you to keep track of the Consumer Confidence Index, Personal Consumption Expenditures and Consumer Price Index. Food and energy are taken out of the calculation because of the volatile nature of these two industries.

Following these measures will help give you a clearer idea of consumer optimism and how much more we are spent for the same product in the past years. These measures are extremely important to the Federal Reserve, as it uses these measures to make predictions of where the economy is heading. We have to remember that the board meetings the Federal Reserve has aren’t every day or week, there are large gaps between their meetings.

“There are two common measures of inflation in the US today: the Consumer Price Index (CPI) released by the Bureau of Labor Statistics and the Personal Consumption Expenditures price index (PCE) issued by the Bureau of Economic Analysis. The CPI probably gets more press, in that it is used to adjust social security payments and is also the reference rate for some financial contracts, such as Treasury Inflation Protected Securities (TIPS) and inflation swaps. The Federal Reserve, however, states its goal for inflation in terms of the PCE.”

Some helpful reminders. The PCE is based off goods and services. Goods being separated between durable and non durable goods. Durable meaning products meant to last more than a couple of years and non durable relating to goods expected to wear relatively quickly. The PCE is used by the Federal Reserve rather than the CPI because of its ability to represent a broader range of expenditures for households.

The CPI is widely reported and is a basket of goods that is measured in terms of prices and is used to track increases or decreases from a base year.  The prices are based on the reference years of 1982-1984 and the reference amount is $100.  They conduct interviews  across the country to gather information on what people like you and me are spending. I guess you shouldn’t be so quick to hang up on those telephone researchers.

Hopefully this is enough information to get started. Questions, concerns, corrections or grievances?

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