Your money: The economy is full of signals. Nearly everyone needs help deciphering them
Chief Investment OfficerMerriam-Webster shows us that, by definition, signals (“an act, event, or watchword that has been agreed on as the occasion of concerted action, or something that incites to action”) should point us to action in the near term. Signals should bring about unity in that action. In relation to economics and finance, signals are referred to as indicators. There are many types of indicators, which include leading, lagging, and coincidental indicators. These signals can be straight forward, like a stop sign, or open to interpretation, like a speed limit. We will discuss a few of the hot button signals garnering attention these days.
Signal: “an act, event, or watchword that has been agreed on as the occasion of concerted action, or something that incites to action.”
Merriam-Webster shows us that, by definition, signals should point us to action in the near term. Signals should bring about unity in that action.
In relation to economics and finance, signals are referred to as indicators. There are many types of indicators, which include leading, lagging and coincidental indicators. These signals can be straight forward like a stop sign, or open to interpretation like a speed limit. We will discuss a few of the hot button signals garnering attention these days.
Inverted yield curve
A yield curve is considered inverted when short-term rates are higher than long-term rates. This has been the case for U.S Treasuries since April. At the time of this writing, a two-year U.S Treasury note would yield 4.6%, and a 10-year note would pay 3.879%. This relationship is often described as a signal of short-term (two-year) and long-term (10-year) inflation expectations. Nearly every time this curve inverts, a recession follows. The length and severity of the recession varies dramatically, but a recession follows, nonetheless.
Many economists also point to the 10-year treasury rate as a signal of investor confidence. The lower the rate, the lower they believe long-term growth will be. Savers will relish higher short-term rates; a 4% savings or money market rate is a great deal compared with rates over the past 10 years.
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Inflation
The cost of a “normal” basket of goods is increasing over time. As the cost goes up, consumers begin to lose buying power and will need to choose where their dollars are spent.
Rising costs can be considered a sign of trouble ahead. As costs rise, wages need to increase or we will all effectively have less money to spend. This must mean rising wages are a positive signal. Workers earning more will certainly spend more.
Great news unless you are an employer and need to choose between raising wages or investing in your business. Less investment in business can slow future growth. Slower growth leads to reduced hiring and higher unemployment.
Unemployment rate
The unemployment rate measures the current percentage of the workforce that is willing to work but not currently employed. Higher unemployment typically means more families with fewer dollars to spend. Less spending from families leads to less business in general, certainly a signal for slow times ahead.
By this logic, a low unemployment rate should be positive, correct? More families with more money to spend must be good for the economy.
To a certain degree, yes. However, the more money we have circulating in the system, the more demand for goods. Low unemployment can make it difficult and costly for employers to hire, leading to higher production costs and slower delivery of the demanded goods and services. This will inevitably lead back to inflation. Too much of a good thing can be bad.
At this point you may be asking why I am contradicting myself at every turn. Simply put, that is how signals in the economy work. It can be as simple as waking up on the wrong side of the bed.
A skilled commentator on your evening news can make a data point positive or negative, depending on their desired narrative. In a time where “news” is often consumed in less than three minutes or 280 characters, the quickest signal is often misleading.
This is where your adviser plays a key role. Have a conversation with a fiduciary. Take some time to discuss how these signals impact your plan. Ask what you should do, if anything, about the data you see.
Patrick E. Gauthier is chief investment officer for CPS Investment Advisors in Lakeland.
This article originally appeared on The Ledger: Your money: Need help deciphering economic signals? You're not alone
