WHAT COMPANIES CAN BE MONITORED FOR CLUES ABOUT THE HEALTH OF THE ECONOMY?

By: Sean Ryan

Many different types of companies can be monitored for clues about the health of the economy.

For example, transportation companies often offer insight into the level of business activity. If business is improving at logistics companies such as Fedex (FDX) and UPS (UPS), then it suggests that companies are ramping up their activity in anticipation of growing demand. Activity at railroads such as Union Pacific (UNP) can tell a similar story.

Retailers can illustrate the health of consumer demand. Wal-Mart (WMT) is both the largest retailer and largest private employer in the U.S., so trends there can be a good indicator of consumers’ willingness to go out and spend.

Companies involved in the production of other raw materials can also indicate the future direction of the economy. For example, increased demand for steel suggests that things are picking up in construction and manufacturing.

Homebuilders offer interesting insights, too. A home is the largest purchase most people will ever make, so demand for new homes can be a good indicator of consumer confidence. New homes also lead to lots of other spending; people who buy new homes are apt to also spend money on everything from new furniture and appliances to television sets and lawnmowers.

In fact, most companies provide at least some clues about the overall economy, because just about everyone has suppliers, and customers. The key is to look up an down the supply chain; ask yourself “What does this company’s condition say about the outlook for its suppliers?’ and “What does it say about the company’s customers?” By thinking about these second-order effects, we can find clues to the health of the overall economy in the results of individual companies.

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