How to Know If the Economy is Booming or Crashing
22 September 2020
When conjuring up images of rapidly growing industries, there’s one field in particular that comes to mind — the fortune-telling trade. It seems that mankind has been drawn to the psychic realm throughout history by virtue of a common demand: people find value in having someone stoke their fears or affirm their dreams.
Perhaps it is for similar reasons that people look to financial soothsayers for reading the economic tea leaves. Often, these types of predictions may be no more reliable than other kinds of fortune tellers, yet we instinctively lend credence to their claims. Talking heads on TV simultaneously shout that the economy is booming and warn that the economy is on the verge of collapse. However, there are a number of ways one can truly gauge the health of the economy.
Financial professionals use leading indicators to predict which direction the economy could go. They analyze charts, earnings reports, unemployment claim rates and manufacturing productivity. Yet not all kinds of experts are capable of calculating, interpreting and articulating these figures to the general public — that’s why we believe it’s wise to do some homework on the sources you’re following before taking their predictions as hard fact.
Ignore the Hot Air
It’s tempting to listen to bold predictions in the news. In fact, broadcasters are incentivized to make big forecasts — it gets ratings. But this doesn’t necessarily mean such predictions are always successful.
A disproportionate number of predictions are negative, making their reliability suspect. Pundits frequently predict economic collapse, because they know people are wired to listen more attentively to bad news.
Imagine this hypothetical situation: a caveman is walking down a path that he frequents and encounters a stranger. The stranger warns that further along on the path, there are bandits. The caveman has no reason to believe this stranger, but losing his bounty would be detrimental. There is a minuscule chance he will actually encounter said bandits, but it only takes one dangerous situation for him to lose everything. He decides he must heed the stranger’s warnings.
Now replace cavemen with investors, and strangers with financial news journalists.
People pay closer attention to bad news in case it is correct, for survival reasons. Yet sometimes it is wise to go against our instincts. Media companies care about ratings — but not always your wallet. Know that recessions are a healthy part of the economic cycle. The economy naturally grows and shrinks. Those who ride out the waves instead of worrying on the sidelines often end up ahead.
Keep Things Simple
Knowing that even media experts can be unreliable, there are ways to still get a feel for the pulse of the economy. You can start by simply observing your surroundings.
Are people around you choosing to spend more on luxury items? Do your friends seem secure in their budgets and confident in the economy? Do long lines seem to indicate a shift in consumer spending — why or why not? If you’re not a financial whiz, this is a way you can gauge the economy yourself. While this won’t provide a complete economic picture, it’s a good start to gaining insight. Focusing on a sole indicator can obscure thinking, whereas viewing all the pieces together could enhance your outlook.
The world of finance can be intimidating, as it includes some abstract subjects. That’s why at In Good Company, we help people gain useful financial knowledge by providing the confidence needed to take action on their financial wellness plan. Often all it takes is a bit of know-how to begin overcoming your financial worries.