Understanding Economic Terms in the News

I considered myself lucky to have escaped college and graduate school with only one economics course. I had other academic pursuits to indulge and couldn’t be bothered with perfunctory economics courses. After all, I knew the basic economic principles of supply and demand, even comparative advantage. I even knew the economic theories of Adam Smith and John Maynard Keynes.

But game show question economics has not been helpful in the current economic environment. Nothing crystalized it more than my score on Kiplinger’s Economy 101 Quiz. So it is no wonder I am lost in the economic jargon now constant in the news.

Assuming I’m not alone, an economic jargon review is in order.

The great folks at Kiplinger (after they’ve proven how “challenged” you are with the Economy 101 Quiz) provide countless resources to get you up to speed.

Firstly, why does the economy matter and why should you spend your precious and irreplaceable time thinking about it? According to Kiplinger, “[t]he ‘economy’ is everywhere these days — on the front pages of newspapers, on the lips of news anchors and on the minds of consumers nationwide.”

Sorry, that sounds like the opening of a scary movie.

Kiplinger continues: “Economics isn’t some nebulous concept. It’s a concrete force on your personal finances. It impacts what you pay at the store, the size of your paycheck, the rates you pay on your debt, the interest you earn on your savings and the performance of your investments — not to mention its influence on your job stability, house value and other keys to your big financial picture. Sure, the inner workings of the economy can be technical, tedious and downright boring to most people. But you don’t need to be a Ben Bernanke to make sense of the basics. Having a general understanding of what the economy is, how it works and what it means for your wallet can be helpful.”

Great. Sounds like a breeze.

A short primer on important terms and figures to look for, and more importantly what they mean is provided below from Kiplinger:

Gross domestic product: GDP is the overall measure of economic performance. In a nutshell, it encompasses everything the nation produces and consumes. If GDP declines, a red flag goes up because the economy could be in trouble. Two successive quarters of decline can signal a recession. That’s why GDP figures are so important to economists and market watchers. Both the Federal Reserve Board and Congress rely on GDP reports when formulating policies related to the economy. However, the information can be dated by the time it reaches you because the Commerce Department publishes it quarterly. Plus, the data are subject to several revisions. For example, first-quarter GDP is released in April, a preliminary revision is published in May, then a final revision is issued in June.

Personal income and consumer spending: Personal income and spending are the best indicators of how the consumer is doing and is likely to do. If incomes are rising or holding steady, consumers probably will continue to spend — which is of utmost importance considering consumer spending drives two-thirds of the economy. If income and spending drop, it could be a sign that economic recovery has stalled. Personal income includes pretax income earned by individuals, nonprofit organizations and trust funds. A component of this indicator is personal consumption expenditures, or consumer spending. It measures how much consumers spend each month on durable goods (such as cars) and nondurable goods (such as food and clothing). The Commerce Department releases these figures the fourth week of each month, the day after GDP figures are published, but the data are from the previous month.

Consumer attitude indexes: Two monthly indicators reflect consumers’ attitudes about the economy and their own financial condition: the consumer confidence index and the consumer sentiment index. The Conference Board publishes consumer confidence index figures the last Tuesday of the month (the survey is completed earlier in the month). The University of Michigan provides consumer sentiment figures five to ten days into each month (the survey is completed the previous month). Both measure the same thing but use different methodologies. Market watchers and economists pay attention to these indicators because when consumers are optimistic, they’re more willing to spend. And they’re more likely to cut back if they’re pessimistic. But consumers don’t always do as they say, says Richard Yamarone, chief economist for Argus Research. That’s why these indicators are more like a barometer: They’re good for predicting shifts in future spending but aren’t an indication of what spending levels will be.

Employment: The Labor Department releases several employment reports, including weekly claims for jobless benefits (on Thursdays) and the monthly unemployment rate. Economists are watching closely to see if jobs are being added — a sign the economy is growing. Employment rates are also closely tied to personal incomes and consumer spending (no job = no income = no spending).

Manufacturing: Industrial production parallels overall movement in the economy, Yamarone says. When orders for goods rise, output usually increases and factories hire more employees. Then unemployment declines, spending increases and consumers’ outlook on the economy brightens. The Commerce Department provides a monthly measure of manufacturers’ orders for durable goods — items made to last three years or longer. A rise in durable goods orders can signal that businesses and consumers are increasing their spending — a sign of economic growth. Another closely watched indicator is the Institute for Supply Management’s monthly purchasing managers index — a composite of new orders, production, employment, promptness of manufacturers’ deliveries and inventories. Economists use PMI to forecast manufacturing recessions or recoveries.

Got all that?   No worries if not.  The most important lesson is familiarity with the terms so you can understand why Wall Street executives are jumping off buildings or the talking heads are going into convulsions.

For those looking for a more in-depth, but readable, book on the topic, try Basic Economics: A Common Sense Guide to the Economy by Thomas Sowell.

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