When was the last time you thought about the economy? Chances are unless you are an economist or some sort of financial advisor you don’t give it much thought. But if you are running your own business or doing your own investing you can’t afford not to think about the economy. What is happening in the economy has a direct relation to how well your business or investments will do going forward, and ignoring economic indicators is a good way to put yourself into an unfavorable situation.
In business knowing which way the economy is headed can help you make better decisions about whether to grow your business or whether to downsize. It can even help you determine what kind of business would be best to open up. Imagine you are planning to open up a fancy French restaurant with white linens and live music and the whole nine yards. Such undertakings are notoriously expensive - there’s a good chance you won’t turn a profit for the first two or three years in the best of circumstances. If the economy is growing strong and people have plenty of money to spend you could go for it and end up building a great business.
Now imagine you’ve looked at the economic indicators like housing sales and foreclosures and they paint a grim picture. People aren’t buying homes and there are more foreclosures than ever before. Does opening that fancy French restaurant still sound like a good idea? Probably not. People still eat during a recession and they may even go out to eat, but they aren’t going to a fancy place with linens. They are going to places like burger joints, pizza places, and diners. Opening a business, even a restaurant, in an economic downturn is difficult but not impossible if you plan things right.
So how do you make sense of economic indices if you aren’t an economist? You have to be able to figure out a little bit of context. Why do homes get foreclosed? Why do people declare bankruptcy? What causes consumer financial stress? Lack of jobs or lack of well paying jobs can be a major contributing factor to all those issues. When people have trouble making enough money to pay their bills the whole economy suffers.
But what if there are conflicting economic indicators? Again, a little context can help you make sense of things. If jobs numbers look good but there are higher than usual foreclosures, it can send mixed signals about what is actually happening in the economy. A composite index, like legal indices, can help make sense of the data. Legal indices add data about how many lawyers are being hired in a given timeframe, which is an indicator that people are ready to take care of their problems and move on.
Learn more about the importance of following economic indices from this infographic. You don’t have to be an economist to make an informed decision about your business or about your personal investments!
