The One Indicator That Explains It All

The once most powerful man in the world describes his old job as 98% talk and 2% action.

That’s Ben Bernanke, former chairman of the U.S. Federal Reserve.

Officially the Fed’s job is to stabilize the economy – controlling inflation and encouraging growth – by setting the country’s monetary policy. When you oversee the world’s largest economy, at roughly $21 trillion GDP, that easily makes you one of the most influential people in the world.

But Bernanke’s comments acknowledge the job is as much about managing the public’s mood as it is about manipulating interest rates and money supply.

Bernanke, his successor Janet Yellen, and current Fed Chair Jerome Powell have communicated relentlessly with the public. The Federal Reserve signals every step it takes for months before it makes a move.

We’ve seen this recently… The Fed has been very transparent about when it plans to raise interest rates. In short, it won’t be for a couple of years. And with that knowledge, folks have felt more comfortable buying into this expensive market.

The central bank takes this approach to avoid dropping surprises on the markets in the hopes they’ll function more smoothly with notice – at least as far as reactions to Fed operations go.

The Fed prioritizing communication reflects the fact that the economy and financial markets are made up of people.

When the Fed wants to, say, boost growth and inflation, it can reduce interest rates as far as it wants… but inflation won’t move until the public is comfortable enough to spend that money.

Similarly, the Fed can bail out every bank in the nation… but a credit crunch won’t stop until everyone believes their money is safe and stops pulling it back in.

Cold, hard transactions make up the economy. And behind every transaction is a human decision. Consumers buy and businesses invest when they are optimistic about the future. Nothing can get an economy humming again like a widespread belief that the economy is improving.

Right now, you should look at the best indicator that explains the condition of the economy: the behavior of consumers.

Consumer spending makes up around 70% of our economy. It determines the decisions of virtually every business. It’s the key driver in investment returns.

When you look at consumer spending, it’s hard not to be optimistic. Spending has quickly rebounded from the pandemic, and it just recently hit a new high of roughly $15 trillion…

You can also look at consumer confidence. The chart below shows the Consumer Confidence Index, which is a survey administered by the Conference Board. It’s a measure of how optimistic or pessimistic folks are regarding their expected financial situation. As you can see, confidence plunged last year. But it has been heading higher in recent months…

You should think of the behavior of consumers as the one indicator that explains it all.

Right now, things look good. Consumers are flush with cash, and they are spending.

And we’ll likely see this spending continue. The progress with the vaccine has been incredible. That means people can begin to plan vacations and start to travel more.

As long as folks are out and spending, things look good for the economic rebound.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
April 7, 2021