The resources and indexes we use to keep tabs on the economy when our news feeds are flooded with distractions and controversies.
In this day and age, new information is coming at us from all directions all the time from hundreds of sources that we often know little about.
Just opening the daily newspaper exposes us to a dizzying array of facts, figures, truth and fiction (disguised as fact) about any number of global, national and local topics.
The new administration is taking swift and sometimes controversial action on a variety of hot political issues that the media is having trouble keeping up with, so much so that what would otherwise be top stories are being relegated to the ‘back pages’.
As real estate professionals, we do our best to keep current on the things that are important to you, our customers.
However, sometimes even we struggle with what stories to discard as irrelevant and which ones to pay special attention to.
In a recent writing on the current state of economics by John Mauldin, we were impressed by his description of what we have been feeling of late. In a reference to George Gilder’s Information Theory outlined his book Knowledge and Power, John had this to say:
“Information theory, at its root, is about distinguishing signal from noise. A signal is broadcast into the air or goes down a telephone line or through a fiber-optic cable, and the challenge is to sort out the actual signal from the noise that accompanies it.”
We think that explains what we have been struggling with quite well, and sometimes just knowing what confuses us makes us less confused and more motivated to fine-tune our listening skills.
Mr. Mauldin goes on to say:
“In the world of economics, an entrepreneur has to distinguish amidst the market noise a signal that a particular good or service is needed. But if some force – a government or a central bank, for instance – distorts or corrupts the transmission of the signal by adding noise to the system, the entrepreneur may have difficulty interpreting the signal and may potentially respond to the wrong message.”
If that is true, then there is no wondering why so many are hyper-focused on the actions of the world’s central bankers and political leaders.
Monetary, fiscal and political policies make the headlines, and thus influence business decision making at the most fundamental level. It often seems that what our appointed and elected experts say might happen next is getting more attention than what is actually happening. So, those of us who follow the economy closely are left to find the signal in the noise.
In our efforts to stay informed, we follow several key indexes and indicators on an ongoing basis, believing it will help us find the signal and cancel out the noise.
They include, among others:
US GDP: This broad-based measurement of total output of goods and services may not be 100% accurate, but it does give us a feel for how the overall economy is performing. It adds up consumer spending, net investment in business, government spending and the net difference between exports and imports.
Employment Statistics: We track U3 and U6 unemployment along with the Labor Participation rate on a monthly basis. U3 is the one we hear about most. It counts as unemployed only those who have been actively seeking work in the most recent 5 week period. The U6 index includes as unemployed, those who are working part time who prefer to work full time, but are unable to secure a full time position. The Labor Participation Rate measures the percentage of those eligible to work who are actually working. We also track wage growth and we pay special attention to employment sectors that tend to utilize industrial space.
US Treasury Yields: US Treasury Bills are considered to be the true riskless investment in the world today. So, they are used as a benchmark for yield expectation in a variety of asset classes. If you want to know what a good deal is just add the premium for risk factors for any investment to the yield on the appropriate term of T-bill and you’ll get pretty close. The 10-year T-bill is the index used to set interest rates for most commercial property mortgages. Lenders add a spread over the 10-year as a risk premium and set their rates accordingly. We keep our eagle eyes on this one every day.
Monetary Policy: We are careful to track the actions of the US Federal Reserve System on a daily basis. Our central bankers have the ability to control the cost and flow of capital by manipulating it Fed Funds Rate (the rate which member banks charge one another for short term loans), and that means their actions are important to every business and individual in the country. In recent years, the Fed has adopted a policy of providing what they call ‘forward guidance’, which makes clear its near term objectives and long term strategy. This has resulted in the Fed’s receiving a lot more attention when it comes to developing business strategies, perhaps even more than actual market metrics. The Fed of old was cryptic and secretive about its position so that it would not influence markets unnecessarily. Those days are gone, at least for now.
ISM Surveys: The Institute for Supply Management publishes an index for both manufacturing and services that measure the extent and rate of growth or contraction in each. It is a broad index, but serves as a useful tool in determining current business activity and near term trends.
Keeping an eye on the actions of all levels of government is also important to us.
Government regulation, legislation and tax policy at all levels has tremendous influence on business decision making. So, we track the goings-on carefully, and do our best to distinguish signal from noise. We don’t want to ignore the importance of politics to business, but so much of what gets talked about never gets done.