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Economic indicators are confusing. On the same day, some of them are positive and show a growing economy while others are negative and reflect a declining economy. How can anyone know where the economy is headed?

The key to understanding economic indicators is whether the indicator is leading, coincident, or lagging.

All Indicators are Not Created Equal

Economic indicators are like driving in your car. Leading indicators are like looking through the front windshield to see where you’re going, Coincident indicators are like looking out the side mirror to show you where you are, and Lagging indicators are like looking in the rearview mirror to see where you have been. The problem comes when you look at all three images and don’t know which is forward, sideways, or backwards. Trying to drive with the views garbled would be difficult indeed.

As investors, leading indicators are the most important to us because the stock market is also a leading indicator. We want to find the earliest leading indicators that we can and notice the co-incident indicators to confirm what the leading indicators are telling us. That will help us invest at the right time – when stocks are going up or about to go up. Stock prices follow corporate profits, so we want to find economic indicators that rise before corporate profits.

Leading indicators include Hourly Earnings, Consumer Spending, and the Consumer Price Index or CPI.

Average Hourly Wages show the wages that employees earn. Many employees will spend all they make, so as this number goes up there is more money being spent and the economy grows.

Consumer Spending, known officially as Personal Consumption Expenditures or PCE, is similar to hourly wages. As consumers spend more, the economy improves soon after. Corporate profits tend to follow average hourly wages and consumer spending up and down.

The Consumer Price Index or CPI is a broad measure of inflation. It breaks down inflation into many different categories that give a solid understanding of where inflation is coming from – if it is across the board or just a temporary reading in one sector.

This leading indicator is a huge danger signal to warn against coming bear markets. When inflation gets too high, the Federal Reserve raises interest rates. All companies with debt are forced to pay higher rates, cutting directly into profits, not to mention consumers. When the Fed continues to raise rates, a bear market is sure to follow.

The best coincident indicator to watch is the GDP or Gross Domestic Product of the most recent quarter. That is the ultimate indication of how well an economy has done without showing where it is heading. Seeing the trend of GDP gives some indication to help in our analysis of the economy.

The most important Lagging Indicator is Unemployment – it is important to ignore. The Unemployment rate is one of the most commonly reported indicators on the evening news. Most people look at it (especially if they are among the unemployed) and think that is where the economy is headed, but that is incorrect. The truth is that companies hire after their financial situations improve, but by then stock prices have already climbed to reflect this rise in profits. In August 2010, the stock market has been in a bull market for 18 months while the national unemployment rate has not improved much over the same period. This shows unemployment is a lagging indicator.

Keep an eye on the Leading Indicators to drive the vehicle of your investments and you will improve where you want to go.

“Deficit spending is simply a scheme for the ‘hidden’ confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.” – Alan Greenspan

Think that $20 bill in your pocket is money? Think again… it isn’t! Real money has three very distinct attributes:
* It must be fungible
* It must be divisible
* It must be a store of wealth

Lets look at these attributes one at a time.

To be “fungible” an asset must be exchangeable for another of equal value. The best example of a fungible asset is gold. My 1 oz gold bar is worth exactly the same as your 1 oz gold bar. The same goes for silver bullion bars. Why not use diamonds or some other gem stone? Simple – diamonds are a product of nature, and come in many different qualities. Diamonds have different colors, flaws, clarity, etc…. An ounce of gold, on the other hand, is minted to a specific weight and purity.

Divisibility is another important aspect of money. True money must be divisible so that you can make small purchases. Through out history, silver coins have fulfilled this role. While gems have value, it is not practical to use them for daily business activities. You can’t buy a loaf of bread and expect the seller to make change for a diamond.

Last – true money must be a store of wealth. The dollar in your pocket has lost 97% of its purchasing power since 1913, the year the Federal Reserve took over our banking system. Here is a frightening fact: The current rate of real inflation is about 6% a year. If you have 100k in the bank right now, it will only be worth 53k 10 years from now. Clearly, the dollar is not a store of wealth.

How did paper money lose it’s ability to be a store of wealth?

Prior to 1971, our currency was backed by gold. In theory, one could go to the bank and exchange paper money for gold or silver. (Private citizens lost that right in 1933. After that time, only foreign creditors could exchange paper for gold). In order to preserve the nations gold hoard, President Nixon closed the gold window. Now, paper money was not backed by anything at all… this paved the way for inflation through reckless money printing. Since it was no longer exchangeable for gold, the government could print as much money as it needed. The flood of new money in the market place drove up prices. Homes, cars, and everything else became more expensive.

The dollar in your pocket no longer money – it is fiat currency. Fiat is a Latin term that means “by decree”. That bit of colored paper only has purchasing power because the government decrees it. The longer you hold it, the less buying power it will have.

Now lets consider the purchasing power of gold. Soon after Nixon closed the gold window, the price of gold averaged $42.02 per ounce. To buy a brand new 1976 Cadillac Eldorado (retail price $7,546) would have cost you 179.58 ounces of gold. Years later, in 2006, a similar car would cost $77,295. The price of gold averaged $443.60 at that time. For the same 179.58 ounces of gold, you could buy an XLR and still have $2,367 left over to buy 739 gallons of gas!
Lets look at this another way. Rich Uncle has 2 nephews. In 1976 he spends $420 to buy 10 ounces of gold for one of his nephews. For the other boy, he places $420 in an envelope. He spent the same amount of money on both boys. Now, in September 2010, the price of gold is hovering around $1,250 an ounce. One boy has an inheritance worth about $12,500. The other boy has $420. Which would you rather have?

While it is true that the price of gold and silver has daily price fluctuations, it still the best store of value on the planet. Do not loose your wealth to mounting inflation – choose the hard assets that have stood the test of time.