In the financial markets, there are basically two major sets of indicators that are used to gauge on the performance of the economy. Since this is the most traded market in the whole world, whatever happens in the financial markets has a direct impact on the ordinary citizens walking down the streets and many people use the event taking place in the markets to gauge on the overall health of a country’s economy. For instance, if there is a positive outlook in the markets, this will translate that the economy is warming up to some good times ahead hence the citizens can expect a lighter load in terms of their finances in the future. On the other hand if what comes from the financial markets are bad news indicating falling indices, falling share prices, reduction in the value of a country currency etc. this is an indication that the economy is experiencing some turbulent times and the citizens should perhaps gear up for more rough times ahead.
The main indicators that are used to gauge on the health of the economy are technical as well as fundamental indicators. Technical indicators are based on short term prices movements and they may not be suitable for judging the overall performance of the economy. They are essentially used by short term traders in the financial markets to make quick trades that result in fast profits, what is known as Scalping in trading terms. Fundamental indicators on the other hand focus on the general state of an economy and take into consideration several factors that might affect the economy. Fundamentals take a long time to change and they are not as dynamic as the technical indicators. Through the fundamental indicators, it is possible for one to tell if an economy is healing or if there is further deterioration so that appropriate actions can be taken by the government to save the economy. Some of the factors considered by the fundamental indicators include the political situation in a country, rates of employment or unemployment, general outlook of the economy by the major companies, fluctuations of the country’s currency, etc.
There are different sets of tools that are used to evaluate both the technical and the fundamental analysis. The Dow Jones Industrial Average, simply known as the Dow and the Non Job Numbers report especially the nonfarm payroll are some of the strongest fundamental indicators that are used to gauge on the health of the United States economy. Millions of people watch out for these two numbers as they are a direct indication of how the economy is going to be for the normal American citizen going about their daily businesses. Below is a brief insight into each of the indicators and their relevance to the American people.
The Dow Jones Industrial Average
The Dow Jones Industrial Average was created by Chares Dow together with others in 1885. Initially, it consisted of 12 railroad companies that were believed to be the backbone of American’s economy. Later on ten more railroad companies and two industries were added to the number of companies used to calculate the index. The intention that Charles Dow had was to monitor the performance of the United States economy by tracking down the performance of these selected companies. From his observations, Dow realized that that there was a very strong correlation between the United States industries and the economy. He noticed that whenever there was a dip in the industries, there would be a general slug in the economy. As the financial markets continued to develop over the years, the Dow became an important indicator which many traders relied on to track the overall performance of the economy.
The Dow Jones Industrial Average today
Presently, the Dow consists of thirty stocks belonging to highly capitalized and influential companies in the economy of the United States. You might think that it would be deceiving to judge the performance of the whole economy based on only a handful of companies yet there are thousands of companies serving the United States. But this is far from it. The companies included in the Dow are extremely influential and besides, the Dow is the most referenced market index in the United States hence it is still a good indicator of the general health of the market.
How the Dow affects you and me
Before we delve into the specifics of how the Dow affects the common man in the street, it is important to understand that unlike other indicators, this particular one is more stable and reliable. Though it incorporates thirty giant corporations, it cannot be manipulated by any single of them neither can the events happening in one of the companies have a great bearing on the value of the Dow index. The Dow is also not affected by news events which are known to sway the other indicators in any direction. Due to these characteristics, it is sufficiently efficient and reliable in telling what is happening to the economy.
For the common man, interpreting the Dow is relatively simple. Since it is not affected by the current happening in the economy, a rise or a fall in the index will indicate that either the economy is improving or getting worse. For instance, if the economy is slowing down, it will be realized that the index is also declining hence this is a signal for the citizens to brace themselves for some tough times ahead. The opposite is also true. If the economy is improving, then index will also record a positive gain and the citizen can prepare for a good economy in the near future. Without going into further details of how the index is calculated, this is simplest way that the ordinary citizens can interpret and make sense of the Dow Jones Industrial Average Index.
The Job Numbers
This is one of the most watched indicators in the financial markets and the markets are always full of apprehension whenever the job figures are about to be released. The figures are released on the first Friday of every month by the Bureau of Labor Statistics. It basically covers data of the previous months relating to unemployment levels, the growth in the number of jobs, pay roll data amongst other statistics. Of all the job numbers that are released by the bureau, the nonfarm payroll data is the one that receives most of the attention due to its importance in gauging the overall performance of the economy.
The nonfarm payroll data consists of all the different kinds of jobs held by citizens in the United States excluding farm jobs. This is because the farm jobs are relatively temporary and cannot be relied upon as permanent sources of income. One may be employed in one farm for a contract of three weeks but leaves before the term ends hence there cannot be longevity with that kind of data. The job categories included while analyzing this data include all paid United States Workers involved in any business.
Relevance of the Job numbers to the citizens
Due to the fact that a majority of Americans are always on the lookout for new job opportunities so that they can get greener pastures, the release of the job numbers usually cause a lot of excitement among the general population. But it should not be misconstrued that the job numbers are giving an indication on the availability of jobs alone. It serves other purposes as discussed below-:
Identifying the rate of economic growth
The jobs number are extremely crucial in identifying the rate of economic growth of the United States of America. When the figures released are much better than those released in the previous months, it indicates that a number of jobs were added to the United States economy. The deeper meaning of this is that the economy is having a positive growth because it was able to create more jobs and employ more of the citizens. It indicates that this is probably a good time to get your resume ready and hit the road in search of greener pastures since some jobs have been added into the economy. A decline in the number on the other hands indicates that some jobs were removed from the economy hence this is a negative growth in the economy. People should therefore prepare to lose jobs or expect pay cuts should they hold onto the jobs.
Identifying the rates of inflation
The job number is also used to give an indication on the rates of inflation of the dollar. Inflation generally refers to how fast the prices of goods and services are rising in the economy and subsequently the reduction in consumers’ ability to afford them. Higher job number indicates a decrease in inflation since there has been in an increase in the purchasing power of the economy. This is due to the fact that economy created more jobs implying that there is enough money to pay for salaries and wages of the new employees. A lower number on the other hand have the opposite effects. The purchasing power of the consumer reduced indicating that the economy is not able to sustain the current jobs hence it must lose some indicating an increase in the levels of inflation.