By The Numbers, A Survival Guide To Economic Indicators
Stephen D. Slifer and W. Stansbury Carnes
International Financial Press, Ltd.

Over the past several months, in my never-ending quest to make the economic news more understandable, I have reviewed about a half-dozen different books about economics and economic indicators. At last I found a book that I believe anyone could understand and could profit from reading. "By The Numbers" is that book.

What's the book about, and why is it useful? Let me tell you in the authors' own words from the first two paragraphs of the introductory chapter.

"Whether you are an investor, broker, financial market economist, business student, or speculator, you want to know the future course of the economy and inflation, the likely response of the Federal Reserve Board to these developments, and, finally, the implications for interest rates. Why are we all so interested? Simply because the combination of these factors is going to largely determine the direction of the major financial markets."

"This book is a simple, easy-to-use pictorial guide to the economic indicators and the Federal Reserve -- the primary factors that move the markets. It describes how these key indicators work and what effect they have and takes a detailed look at the U.S. central bank. Using this book as a guide, you will be better able to interpret the reactions of financial markets to economic news and plan accordingly."

I have read and re-read this book and I agree with every word they said.

The book is divided into three parts. Part I is an overview that explains how the economy and the financial markets interact with one another and how the Federal Reserve acts to keep the economy on an even keel by its operations to control short term interest rates. This chapter presents the classic GDP = C + I + G + X - M equation (See economic indicators articles for 10-18-95 and 10-24-95) and lists the economic indicators that contribute to each element of the equation. An indicator significance-rating system is introduced that ranks each indicator from four stars (crucially important) down to one star (routine). It turns out that, because of the newness of the data, the indicators that are released early in the month generally have greater impact than those released later.

Part II, the longest of the three sections, has 20 chapters that explain the economic indicators introduced in Part I. The indicators are discussed in more or less the same order as the indicators become available during the month. Each chapter starts off with a chart showing the indicator's star rating, how the markets react to changes in the indicator, and a listing of noteworthy characteristics of the indicator. Each chapter is profusely illustrated with diagrams, charts, and graphs that clarify the material. The long-term graphs, showing the behavior of the indicator during past recessions and expansions, were particularly useful. Many of these charts extended back as much as 35 years.

Part III describes which of the indicators in Part II are most important to the Federal Reserve. It explains how the Fed interprets the indicators, how it determines what monetary policy it believes is required, and how it goes about implementing that policy. The Fed, by way of its open market operations, can control the level of bank reserves. This, in turn, influences interest rates and the money supply, consumer and business spending and, ultimately, the rate of economic expansion and inflation. With the knowledge gained from Part III, the individual investor can formulate his or her own forecast of what the Fed will decide to do at the next meeting of the Federal Reserve Open Market Committee.

Inside the back cover is a 3 1/2 inch floppy in PC format containing a demo of Global Portfolio Manager simulation software published by the parent company of the publisher of the book. There is a 34 page appendix at the back of the book explaining the use of the demo. I have a Mac system so I couldn't evaluate the program. But, the book stands on it own merits regardless of whether or not one can access the demo.

I would recommend this book to anyone who wants to improve his or her understanding of the intimate interelationship between the economy and the financial markets.

About the authors: Stan Carnes received a PhD in economics from Georgia State University, and also taught there. He is currently the Managing Director and Senior Taxable Fixed Income Strategist at Smith Barney. Steve Slifer is a former Senior Economist for the Federal Reserve Board of Governors. He is currently the Chief Financial Market Economist for Lehman Brothers. He has been named as the number one Fed Watcher on the Institutional Investor All-American Fixed-Income Research Team.

Byline: Lafferty (MF Merlin)