7 economic indicators you should know as a small business owner

As a dedicated small business owner, it’s vital to keep your finger on the pulse of the economy. Economic indicators offer valuable insights into the current (and upcoming) economic landscape, helping you steer your business in the right direction and avoid costly mistakes like trying to expand just as the economy recedes, or missing out on growth opportunities because you weren’t ready when customers were more able to spend. In today’s post for business owners, we will walk you through what we consider the seven essential economic indicators you should watch closely. You’ll learn what each indicator means and how it impacts your business’s growth and strategies.

To keep this post timely and provide real-time data, no matter when you find it, we’ve embedded a real-time measure of each indicator from a terrific free source, TradingEconomics. These graphs indicate the economic data for the United States, but TradingEconomics covers nearly every country in the world. For those indicators that we could not embed a live look, we linked you to the data.

A note about these graphs – the most recent data point is interesting, but it’s not always correct and certainly doesn’t tell the whole picture. Trend and trajectory matter much more than one recent data point, which is often revised later when more information is available. Economists combine this data, and that of many other indicators, to derive a better overall picture of the health of the economy. At nVest Advisors, we do that research on behalf of our clients, and to help us guide your investments, on a weekly basis that you can read in our Weekly Economic nSight posts here in our blog.

Gross Domestic Product (GDP)

source: tradingeconomics.com

Gross Domestic Product (GDP) serves as a compass for the economy’s overall health. It measures the total value of goods and services produced within a country. GDP varies widely between developed nations and those we call “emerging markets”. Here in the United States, when GDP is rising between 2% and 3%, this indicates a flourishing economy, consumer confidence, and potential increased demand for your products or services. Conversely, if GDP drops below 1%, it could signal a struggling economy with reduced consumer spending.

Unemployment Rate

source: tradingeconomics.com

The Unemployment Rate gauges the percentage of job seekers who can’t find work. An unemployment rate below 5% is a positive sign, suggesting a thriving job market and increased consumer spending power. It may also indicate that finding new team members may be a challenge and that higher wages and benefits may be necessary to lure them away from competitors, which is one of the earliest indications that inflation may become a problem down the road. An unemployment rate exceeding 7% might indicate an economy in trouble, potentially leading to a decrease in consumer demand.

Consumer Price Index (CPI)

source: tradingeconomics.com

The Consumer Price Index (CPI) tracks price changes for a basket of goods. If CPI increases within a 1-2% range, it signifies stable inflation rates. This can be beneficial, as it implies consumers have steady purchasing power. However, if CPI climbs beyond 3%, it could point to rising prices that might affect your costs and margins negatively and the consumer’s ability to spend.

Inflation tends to come in waves after excessive changes in the money supply (like what recently happened during the Covid-19 pandemic), and it must be fought aggressively by a nation’s central bank through reversals in loose monetary policies. Inflation that becomes entrenched over longer periods of time can be very difficult to undo, resulting in permanent price and wage hikes and permanent changes in consumer spending patterns (this is called “demand destruction”).

In short, we want just a little inflation, as it indicates a growing economy, but too much becomes a major problem. Fighting inflation is one of the two mandates we gave to the Federal Reserve Bank when it was founded in 1913.

Retail Sales

source: tradingeconomics.com

Retail Sales are a barometer of consumer confidence and spending. A monthly growth of 1-2% shows consumer optimism and a potential sales boost for your business. On the flip side, declining retail sales of more than 2% could suggest a cautious consumer attitude, which might require adjustments to your marketing strategies.

Business Confidence Index

The Business Confidence Index reveals entrepreneurs’ economic outlook. An index value above 100 indicates heightened optimism, which might lead to more business investments and potential growth opportunities for you. Should the index dip below 100, it could signify economic uncertainty, prompting you to reassess your business strategies.

Interest Rates

source: tradingeconomics.com

Interest rates set by central banks impact borrowing costs. Lower rates often stimulate economic activity, so when rates hover between 0-2%, it can be an ideal environment for business expansion and consumer spending. Conversely, higher rates of 4% or more could discourage borrowing and spending, potentially impacting your sales.

As we mentioned during the discussion of the CPI number, inflation is often controlled in large part by the availability (and cheapness) of money, so one of the primary tools our Federal Reserve bank has to tame runaway price inflation is to raise interest rates and reduce the money supply (a monetary policy called quantitative tightening), and when the economy is in bad shape, the Fed can lower rates and do other stimulus activities (a policy called quantitative easing).

Housing Starts

source: tradingeconomics.com

Housing Starts reflect new residential construction projects. If starts are between 1-2% or higher, this suggests a healthy housing market, indirectly benefiting sectors like home improvement. However, a decrease in housing starts by more than 2% might signal caution, as it can affect related industries and consumer spending.