Friday, January 31, 2014

5 Signs of a Booming Economy

Consumer Prices Index: Inflation's Ups and Downs
Today’s economic climate is anything but stable. Some reports say the economy is buoyant while others predict doom and gloom, so how do you navigate the ‘double speak’ and ascertain what is really going on with the economy? Here are 5 signs that indicate a booming economy. 

Employment Levels

The employment rate is an excellent and accurate indicator to help track the state of the economy. Australia fared very well in the global financial crisis as it was able to maintain high levels of employment, mainly due to the mining industry which sustained growth throughout the crisis.

A healthy mining sector results in jobs not only in the mines themselves but also create employment in many other industries. Hyundai Construction Equipment is just one example of this spill-over effect which sees entire industries sustained by the mining boom. Safety equipment, maintenance needs and catering requirements are a couple of other examples.

To gage employment levels correctly it is important to ascertain the percentage of the population in actual employment, as the unemployment rate doesn’t tell the whole story. Students are an example of how unemployment figures can skew the results. To ascertain the health of the economy it is necessary to understand how many people are actually on the payroll.

Personal Income and Outlays

Another sign of a booming economy is high personal income and expenditure rates across the population. Reductions in employment and income soon result in reduced spending and the economy suffers. The roll-on effects are swift.

Spending across all areas of goods and services is often one of the first clues to future economic trends.

Retail Sales

Economists follow retail sales closely to help understand the spending behaviour of consumers. While most retail stores sell to individuals just as many sell to small business and contractors. Thus high performance in the retail sector affords a pretty conclusive glimpse at the robustness of the economy at any given time. Conversely, a drop in retail sales indicates a fall in the economy. 

Consumer Price Index

The Consumer Price Index, or CPI, is also the focus of economists. The overall Consumer Price Index is an attempt to measure consumer pricing, to see how the price of goods changes. In a nutshell, the CPI measures inflation. 

New Home Sales

Another strong indicator of a booming economy is strong growth in new home sales. New homes have a greater impact on GDP (gross domestic product) than existing home sales. A new home generates much more spending than selling an existing one. Building a new home will require builders, cabinet makers, roofers, plumbers, carpet layers, tilers and more. Added to this is the materials required to build a new home including timber, brick, cement and gravel to name a few. For this reason the rate of new home sales is highly relevant to determining the resilience of the economy. There is usually a lot of spending associated with moving into a new home too, buying electronic equipment, white goods and furniture.

Watch these signs and you will get an idea of how the economy is performing and make your investment decisions accordingly

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