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The WSJ Guide to the 50 Economic Indicators That Really Matter

by Simon Constable and Robert E. Wright (2012)

Quick summary -- an in-depth PhD-level extended summary (10-30 pages) for this book is coming soon.

The WSJ Guide to the 50 Economic Indicators That Really Matter

By Simon Constable and Robert E. Wright

Quick Summary

A practical guide to 50 economic indicators -- many obscure and off the beaten track -- organized by GDP components (Consumption, Investment, Government, Net Exports) and cross-cutting themes (inflation, fear, uncertainty), designed to help investors anticipate business cycle turns and make informed investment decisions ahead of the crowd.

Executive Summary

Simon Constable (Wall Street Journal columnist) and Robert E. Wright (economic historian) present 50 economic indicators chosen specifically for their ability to give investors an informational edge. Deliberately excluding widely followed metrics like the Consumer Price Index (because knowing what everyone knows provides no advantage), the authors focus on lesser-known but highly informative indicators. The book is organized around the fundamental GDP equation (C + I + G + NX) plus a section on inflation, fear, and uncertainty, making it both an economics primer and a practical investment tool.

Core Thesis

The authors argue that investors who rely solely on widely followed indicators are destined to buy high and sell low because they learn about economic shifts at the same time as everyone else. By monitoring a broader and more exotic set of indicators, investors can detect turning points before they become consensus knowledge. The key is to look for convergence across multiple indicators pointing in the same direction, as individual indicators are subject to noise, seasonal distortions, and revision.

Indicator Categories and Highlights

Consumption (C)

  • Automobile Sales -- A leading indicator of consumer confidence and economic health
  • Chain Store Sales -- Weekly data providing early signals of consumer spending trends
  • Consumer Sentiment -- The University of Michigan and Conference Board surveys as forward-looking sentiment gauges
  • Existing Home Sales -- Reflecting the health of the crucial housing sector
  • Underemployment/Slack -- A more comprehensive measure of labor market weakness than the headline unemployment rate

Investment (I)

  • Book-to-Bill Ratio -- Semiconductor orders vs. shipments as a tech sector leading indicator
  • Copper Price -- "Dr. Copper" as a barometer of global industrial activity
  • Durable Goods Orders -- Forward-looking measure of business investment intentions
  • Housing Permits and Starts -- Leading indicators of construction activity and economic confidence
  • ISM Manufacturing and Non-Manufacturing Surveys -- Diffusion indexes providing timely snapshots of business conditions
  • JoC-ECRI Industrial Price Index -- Commodity-based inflation signal
  • London Metal Exchange Inventories -- Physical metal stocks as a global demand indicator
  • Unit Labor Costs -- The relationship between wages and productivity as an inflation signal

Government (G)

  • Federal Budget Deficits and National Debt -- Long-term structural indicators of fiscal health

Net Exports (NX)

  • Baltic Dry Index -- Shipping rates as a pure demand-driven indicator of global trade
  • Big Mac Index -- The Economist's purchasing power parity measure for currency valuation
  • Current Account Deficit -- The broadest measure of a nation's external balance
  • Oil Inventories -- Weekly EIA data reflecting energy demand and economic activity
  • Tankan Survey -- Japan's comprehensive business conditions survey
  • TIC Data -- Treasury International Capital flows showing foreign demand for U.S. assets

Multiple Components

  • Beige Book -- The Fed's qualitative economic survey
  • Crack Spread -- Refining margins as an oil market and economic indicator
  • Credit Availability Oscillator -- Measuring the ease of obtaining credit
  • Federal Funds Rate -- The Fed's primary policy tool
  • Fertility Rates -- Long-term demographic and economic indicator
  • GDP per Capita -- The wealth standard of living measure
  • LIBOR -- Interbank lending rates reflecting financial system stress
  • M2 Money Supply -- Monetary aggregates as a liquidity and inflation indicator

Inflation, Fear, and Uncertainty

  • GDP Deflator -- Broadest measure of economy-wide inflation
  • Gold Price -- Inflation expectations and safe-haven demand
  • Misery Index -- Combined inflation and unemployment
  • VIX -- The CBOE Volatility Index measuring market fear
  • TED Spread -- Treasury vs. Eurodollar spread as a financial stress indicator
  • TIPS Spread -- Market-implied inflation expectations
  • Credit Spreads -- Risk appetite measured by yield differentials
  • Texas "Zombie Bank" Ratio -- Banking system health indicator

Practical Applications for Investors

  1. Dashboard Construction -- Build a personal economic dashboard monitoring 10-15 of these indicators regularly.
  2. Convergence Analysis -- Look for clusters of indicators pointing in the same direction to confirm economic turning points.
  3. Contrarian Positioning -- Use the more exotic indicators to identify opportunities before they become consensus.
  4. Asset Allocation -- Adjust portfolio allocations (stocks vs. bonds vs. commodities vs. cash) based on the business cycle stage indicated by these metrics.

Critical Assessment

Strengths

  • Practical, accessible explanations of each indicator
  • Organized around the GDP framework, providing economic context
  • Focus on lesser-known indicators provides genuine informational value
  • Each chapter includes where to find the data, how often it is released, and how to interpret it

Limitations

  • Some indicators may have become more widely followed since publication, reducing their edge
  • Limited discussion of how to weight or combine indicators systematically
  • U.S.-centric despite the global economy's importance
  • Does not provide a formal model for translating indicator readings into specific trade decisions

Conclusion

The WSJ Guide provides a valuable toolkit for investors who want to understand the economy at a deeper level than headlines permit. Its emphasis on lesser-known indicators and the principle of multi-indicator convergence offers a practical framework for anticipating economic turning points before they become obvious to the majority.