Health of the American Economy Is Predicated Term Paper

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health of the American economy is predicated on favorable financial conditions. Economic indicators serve as a barometer of the country's economic health, which in turn can spell profits or ruin for most companies. Economic growth provides a template for investor expectations. If an investor notes that leading indicators, such as contracts for new home sales, are rising then he or she knows that a perfectly distributed index fund that reflects the performance of the entire market will grow in value.

Consumer behavior is largely correlated with national economic growth. If a consumer sees that the economy is doing poorly, she might be worried about her job and forego a vacation or the purchase of a home entertainment system. Alternately, she may still purchase a washing machine if the one she owns breaks down. Such a person might be tempted to pass over the Dom Perignon for Boone's Farms, or her usual Dunhill Cigarettes for Basic 100's. This has lead mutual fund managers to break down consumer goods into different investment sectors that reflect economic cycles, including consumer cyclicals, consumer durables, and counter-cyclicals.

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Consumer cyclicals are consumer goods that sell well during good times and take a beating during hard times, such as the home entertainment system. Consumer durables are largely immune to market fluctuations. Counter-cyclicals perform normally or better during hard times - these include down-market products such as fortified wine, economy-brand cigarettes or bus tickets.

Unemployment is important for several reasons. First of all, it is a general indicator of economic health. Whereas employed people buy new cars and computers, unemployed people are more likely to sit at home going over the help wanted section of the newspaper or hotjobs.com. Unemployment also decreases federal revenues while burdening the unemployment roles. The Federal Reserve will often lower interest rates in response to unemployment in order to encourage growth; companies are pleased because….....

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