Whether you are looking for the right time to jump into the
stock market, or simply thinking of changing savings accounts,
planning your next financial move can mean deciphering a constant
stream of economic and investment news. This often comes down to
distinguishing which information represents economic reality, and
which is more of an illusion.
Here are six widely followed economic indicators, along with an
assessment of how much each represents illusion or reality.
1. New highs in the stock market
This is often an illusion. For example, the stock market reached
new heights recently not on the strength of record earnings, but
because interest rates are unnaturally low. Think about it:
According to the FDIC, rates on savings accounts recently hit an
average of 0.07 percent, and
rates were barely higher at 0.10 percent. Those paltry interest
rates are forcing more and more people to consider the stock
market, but if rates returned to the 4 or 5 percent range, much of
this support for the stock market would disappear -- unless company
earnings had strengthened.
2. Company earnings
That must mean company earnings represent economic reality, right?
Yes, but with a couple of reservations. Earnings gains driven by
top-line sales growth are a sign of fundamental business strength.
Earnings gains due to cost-cutting reflect one-time moves that
often can be detrimental to future top-line growth.
3. Consumer spending
Right now, this is an illusion. Yes, it represents actual economic
activity, but too often with borrowed money. In a normal economic
slump, getting people to spend, even by borrowing, is a good way to
jump-start a recovery. However, in January 2013, total consumer
debt outstanding reached a new all-time high. Until employment and
earnings start going up, spending gains based on continued
borrowing by over-extended consumers should be considered an
4. Consumer confidence
An illusion. Though consumer confidence figures are dutifully
reported by just about every news outlet, the truth is that
consumers are often confident right before things turn sour, and
nervous when things are about to get better.
5. Weekly unemployment claims
Another widely reported figure that is more illusion than reality.
First, weekly numbers are just too volatile to be of much use.
Second, employment claims sometimes rise when the economy is
getting better, as people who had previously given up trying to
find work re-enter the labor force.
6. Monthly job creation
This is a pretty good indicator of reality. To be sure, the
job creation numbers
can give a false signal in any given month, but longer-term trends
in jobs indicate whether new money is actually coming into the
The difficulty of separating illusion from reality is one reason
why there are both buyers and sellers in the market on any given
day. It's also important to remember that illusions might dominate
popular perception for weeks or months at a time, but the more you
can keep your focus on reality, the sounder your financial
decisions will be in the long run.