The word “unprecedented” has been used extensively to refer to the way 2020 has unfolded. Between a global pandemic, one of the most heated presidential elections in recent memory, and race riots breaking out in every major American city, it has been quite a chaotic year. Experts may have a challenging time forecasting what direction the economy will take next.
Several reports have come out predicting “doom days ahead” for the U.S. economy; but why? What specific factors and signals are experts looking at when they say this?
Here are the big three:
1. The Rate of Layoffs
Experts predicting “doom days” for the economy start off by looking at increased rates of layoffs as a way of measuring economic health. The idea is that more layoffs are a sign of economic instability, since they point to businesses not being able to hold on to their employees.
Other experts point to how this might not be the best figure to use.
In fact, in 1981, the government Bureau of Labor Statistics stopped using layoff rates as an economic indicator. Instead, they turned to overall filings for unemployment. Layoff rates can be wildly skewed depending on the business sectors being examined as well as the extent to which the workers laid off are part of an active workforce. More sophisticated statistics factor into consideration layoffs combined with whether individuals are actively looking for more work.
2. Consumer Spending Habits
Overall, consumer spending on goods is believed to correlate directly with consumer optimism. Economists rate consumer spending as comprising 60-70% of the economy, and so it even holds water as a standalone measure of economic trends. Still, critics of this figure note that it’s somewhat redundantly incorporated into other economics statistics that are effectively measuring the same thing, such as gross domestic imports (which also gauge consumer demand). Citing both means you are looking at the same trend twice.
3. Consumer Confidence Surveys
Major news sources like Reuters work with reputable consumer polling groups to gauge sentiment as well as economists to predict trends and interpret consumer data. Depending on the timing of these surveys and how they align with major news events, the correlation between current events and financial outlooks can be made visible.
One of the biggest consumer confidence groups is the Conference Board, a non-profit that works closely with Nielsen Holdings’ analytics capabilties to get ahead of what is to come for individual income, business trends, and labor markets. Much of the data cited across news media sources comes from the monthly Consumer Confidence Surveys that they release.
Understanding what experts are looking at when they make predictions about the economy’s future can help you make sense of their evaluations. It can also help you follow the conversation as other experts chime in to challenge them. Keeping an eye on overall economic trends can help you contextualize any financial decisions you make, but you should always remember that those conditions are constantly evolving.
