Fundamentals, My Dear Watson

The Fundamental Issue

After Obama was elected to presidency, the stock market has taken a hard hit. Yahoo news stated that investors are going back to the fundamentals of the economy. I felt it would be a good time to discuss this concept of “fundamental”. It’s a concept that seems to be used quite often. Furthermore, when used incorrectly (i.e. a comment from McCain that the “fundamentals of the economy are sound”), it has disastrous consequences.

So what exactly are the “fundamentals” of the economy? Is there a list somewhere out there? Fundamental, by its very definition, implies “basic” or “building block”. So what are they? And if they are so important, why do we need anything more than just the fundamentals?

Fundamental Menu?

You probably have an idea of what the fundamentals consist of. The unemployment rate seems quite important. The Producer Price Index (PPI) and Consumer Price Index (CPI) are mentioned from time to time. The Gross Domestic Product (GDP) is definitely somewhere up there on the big list of “fundamental” numbers everyone should be aware of. And we can’t ever forget the Federal Fund Rate. I’m definitely missing many more fundamental indicators of the economy and how well it’s doing. With everything going on, how do you make sense of it all?

Fundamental Training Wheels

Education is probably the best asset you will have when making assessments of the economy. I’m not talking about bachelors, masters, or doctorate degrees. I’m talking about plain and simple knowledge. The mere fact that you are reading this article, scanning the internet for the wealth of information out there, etc. means you’re one step ahead of the game. Learning more about these indicators allows you to understand the nature of what they represent and the assumptions inherent in them.

If you start doing some research on various economic numbers, you’ll see a lot of them are delayed by a few weeks or even months. At best, indicators give you a story of the history and experts typically try to extrapolate the current status of the economy from them. Even experts can be wrong with advanced degrees in economics and finance. They have been wrong numerous of times in the past and they are likely going to be wrong in the future. So education is certainly important but it’s not the end all say all answer to understanding the fundamentals.

Local Economic Basics

It is important to realize that a lot of economics can be localized. This means that although the national situation may look grim, your local area will either be better than the nation or worse. There won’t be numbers talking about the specific GDP of your town or the Produce Price Index of your nearest grocery store. There also won’t be a consumer confidence report on your neighborhood. It is important to remember that even though the national economy affects everyone, it is the local economy in which you make and spend most of your money.

Assessing your local economy is important. It can be as simple as taking a ride down your busiest street during lunch or dinner to see how packed the restaurants are. You can go to department stores to find whether or not their luxury items are going on sale. You can see whether the price of food, gas, and real estate in the area. These aspects of your local economy will be the most fundamental to you. Everything else is just a statistical averaging for government officials and national businesses to make assessments from.

What It All “Fundamentally” Means

Assessing the local economy simplifies matters quite a bit. Furthermore, it is more likely to be relevant to your situation than the national reports. After you’ve made your assessment, you can now analyze the various opportunities that present themselves to you. Here are some examples:

• Questions like “Should I go to college out of state or in state?” can become, “What does the job market seem like in my local area versus the area out of state?”
• Questions like “Should I take a job now or go to school?” becomes, “How sustainable is this job and what are the prospects in school?”
• Investing in real estate can become simplified to, “Does this place have a strong local economy?”
• If you wished to open a new restaurant, you can simply ask whether the current restaurants in the area are crowded to the brim or if there is a local center (i.e. a college campus, a large building with office space, etc.) that can support your new prospective restaurant.
• If you’re not sure your current business can sustain itself during tough economic times, ask how the local economy is doing in your area and act accordingly. You may want to close shop temporarily, relocate, or simply downsize your current operations. (i.e. a florist located next to a funeral home doesn’t necessarily need to worry about rising oil prices. However, they may need to adjust prices and bouquet sizes for shrinking economies.)

By keeping a local perspective, you are more likely to understand the fundamentals that will matter to you. Unfortunately, understanding the fundamentals is not a get rich quick tactic. It is simply a tool that helps to make a more informed decision.

-Wishing you a healthy local economy

EC

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