When economy is hit badly with recession, the sales volume and revenues of businesses go down, employees are fired or they suffer from a severe cut in their paycheck, the number of bankruptcy filings increase and an array of other such nasty things happen.
As we can see, there are enough signs and indicators to tell if the economy is suffering from a downturn. But, when it comes to identifying the signs of economy improvement or economic recovery, things are not that easy. It requires a careful study and research. Following is a brief rundown on the five most crucial signs of economic recovery.
Are Banks Lending Loans To Small Businesses?
In order to grow, small businesses often need loans from banks. And, the growth of small businesses is a solid indicator that the economy is improving. A stable recovery and higher employment rates come with the growth of small businesses. If such businesses are seeking loans from banks and they are getting it, it means things are going back on track. You can access the details regarding the same by studying the new Thomson Reuters/PayNet Small Business Lending Index. You can also get information about the latest bank lending activities by visiting the official website of the Federal Reserve.
Sentiments In The Business Community
The next factor that you have to study is the sentiments in the business community, such as how entrepreneurs feel about the economy and how optimistic they are about the growth and expansion of their businesses. Are businesses hiring new people? Have they started increasing their inventories? Are they getting timely deliveries from suppliers? Have their production levels increased? Are they taking new, bigger orders? If the answers to these questions are affirmative, it is a good sign of economic recovery. The Purchasing Manager’s Index (PMI) provides you the details about all these things.
However, you have to be a little careful while you are studying the increase in inventories and business expansion. Sometimes, it happens that businesses first run down their inventories and then increase their production levels; such things are usually more common during the very early stages of economic improvement. Businesses tend to do this because they do not want to take undue risk by overextending themselves, but at the same time, they also do not want their competitors to take away their customers and capture their share. This way, it can be said that an increase in production is a better indicator of economic recovery as compared to the increase in inventories.
What Consumers Feel About The Economy?
The Kind of sentiments and feelings that the business communities are having is all well and good, but consumer sentiments are probably much more important when it comes to identifying whether the economy is improving or not. The expansion and growth of businesses must get reflected in the optimism shown by the consumers also. It will help you get a more accurate picture on how the economy is moving on. Consumers sentiments are very much like self-fulfilling prophecies, most often based on thin air, but they still do matter a lot.
For example, if a vast majority of consumers are complaining about how bad the economy is going on and that they are now more focused toward saving money and that they are cutting down their expenses, it is a clear sign that the economy will still take some time to recover. Even if the businesses are getting stability and they are able to obtain loans from banks, if they are still unable to woo their customers, the economy cannot be said to be improving.
You can get detailed information about consumers sentiments by studying various indexes, such as Michigan Consumer Sentiment Index and Consumer Confidence Index (CCI). These are actually surveys that note down people’s reaction about the economy in near-term on the basis of their individual experiences. If the surveys show that consumers are now more optimistic, it is a sign that they will now indulge in activities that are good for the economy; for example, optimistic consumers are very much likely to spend more money than before.
The Spending Habit Of Consumers
Spending more money might be bad for the financial health of consumers, but it is good for the economy, especially in the United States of America. Economic recovery cannot happen unless the consumer spending rebounds. When financial situation of people starts improving, they tend to spend more; it is a natural consumer tendency; they get a bonus and they want to go for a vacation; they get a rise in their salary and they want that new sofa set in their home.
At least, during the early stages of economic recovery such things are quite noticeable; later, consumers may become more sensible and start spending less and saving more by following a strict budget plan, but that happens later only. Consumers opening their wallets generously thus is one of the strongest signs of economic improvement.
While you are studying consumers’ spending habits, you may also like to do a thorough analysis of shipping activities. Though changes in shipping activities alone may not provide you any idea about whether the economy is improving or not, but when you study these changes in light of consumers spending habits, you will get a more accurate picture regarding economic recovery. Some important indexes that you may like to study in this regard include the American Trucking Association’s Truck Tonnage Index and the Cass Freight Index.
Last, but not the least, you cannot imagine an economic recovery without increase in the employment rate. If people are still jobless and the increasing unemployment rate is the talk of the town, it clearly means economy is still suffering. When people are jobless or are on the verge of losing their jobs, they will obviously spend less, which means businesses will also not increase their production levels; it‘s all inter-connected. In short, employment is probably the strongest indicator of all other signs of economic recovery.
You can conduct your study regarding the changes in employment rate with the help of ASA Staffing Index and unemployment and non-farm payrolls. However, it is very important for you to understand that none of the signs mentioned above is foolproof; you cannot say whether the economy is improving or not just on the basis of a single indicator. All of the above signs of economic recovery must be taken into account to get the most accurate picture.