Investors are inundated with countless headlines about the economy. It can be hard to separate what really matters from what’s just noise.
Economic growth and market performance are closely related, and it’s important for investors to have an accurate and understandable picture of the economy. In this Q&A, Senior Portfolio Manager Anwiti Bahuguna explains how she uses big-picture economic data to help make investment decisions.
Q: How important is your view of economic growth in making investment decisions?
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Economic performance definitely has an impact on market performance. It's important for us to have a sense of how economic growth will affect people's spending and income, and how that might affect companies’ sales, hiring, profits, and ultimately, how that will impact the stock market or other components of an investment someone may have, such as bond yields. These factors paint a picture to help us invest.
Q: What are the indicators of economic growth that you follow, and what do they tell you?
A very simple measure of growth is something called GDP, or gross domestic product. It’s one standard way of measuring how fast a country’s economy is expanding. The U.S. Bureau of Economic Analysis provides quarterly estimates of how the United States economy is growing. But for investors, it’s important to get more frequent data releases to gauge the direction of economic activity.
Let’s start with labor markets as an example: We get monthly payroll reports, and that gives us a sense of how many people are getting hired. If more people are getting jobs, then perhaps we can predict that the economy is growing because there's a need for more labor. We also get weekly jobless claims data, which shows how many people are filing for unemployment benefits. If that number is going up, then there’s a cause for concern.
We look at a number of other things regularly, too, including industrial production measures, trade data, and income measures to name a few.
"I don't necessarily think everyone has the time to follow all this information, but as professional investors it’s something we love doing, and I find it extremely interesting."
Q : What have these more frequent indicators been showing you lately?
There was a strong rebound in industrial production in April. It rose 1%, beat expectations, and signaled strength in the manufacturing sector. Because industrial production is a hard indicator (meaning it’s based on actual results, not just expected results) and it’s showing broad strength for the first time in years, this may be a clue that economic growth is improving.
Source: Columbia Threadneedle Investments and Haver Analytics as of April 2017.
Q: So how is the U.S. economy doing?
Well, we've had pretty decent growth for the last few years, but not what I would call strong growth. The U.S. economy has grown, on average, around 2%, and we think that can be achievable this year.*
Q: Do you take politics into consideration when you look at the economy?
Ultimately, stock returns will be driven by how well a company does and how well the economy is doing. And policy, or legislative actions, can have enormous impact on that growth. For example, tax policy affects businesses, and it also affects consumers’ ability to spend and save. Fiscal policy, how the government spends, and what kinds of projects it undertakes also affect economic growth. So, yes — because politics drive policy, and policy has an enormous effect on growth, we do watch politics very carefully.
We’re cautious about not projecting too much into our growth figures based on the new presidential administration and potential changes in policy. We don't see signs of the administration affecting the U.S. economy in a major way this year. But it’s something we’re watching very closely to see whether it starts impacting the economy in a positive fashion either toward the end of this year or next year.
Q: Your bio says you have a Ph.D. in economics. Is your 12-year-old son impressed?
No! Once I was quoted in the Wall Street Journal, and my son’s response was, “Why aren’t you on the front page?” I told him you never want to be on the front page — that’s where the bad news gets published!
*Source: U.S. Bureau of Economic Analysis, 2010-2016
Article by Anwiti Bahuguna, Ph.D. - Columbia Threadneedle Investments