I need to build an index that checks how good is the economy in any given time, what parameters should i use?

Question

for example, growth in the Usa, Imf growth, Inflation , Intrest rates and so on..where do i get all this info , what other variables should go in?
how do i build this equation, does anyone use an equation like that before deciding if its a good period to enter the stock market and how much of his money should he risk?

Answer 1

The federal reserve, treasury department, department of commerce, department of labor, each make contributions to what is commonly called the leading economic indicators. Major business web sources could be the Wall Street Journal (wsj.com), Businessweek.com, and cnn.com business.

There will be papers on discussion of weighting evidence in the federal reserve site, among others (the common commercial sites will give summaries with their commentaries, less technical and distinctly biased to stock market impacts).

Usually, those who devise a new index have a theory they are supporting or attempting to "prove". The issue of "weights" is something your theory or hypothesis suggests. Dig the data, build a pattern, devise a theory, then weight according to your hypothesized critical factors. (A lot of work, isn't it?)

Answer 2

You don't have to build your own index, since that will be very complicated. The basic fundamentals are GDP or GNP, interest rates, unemployment rate, growth in sale of capital machinery, change in inventory of manufactured goods , housing starts, stock market index, yield curve which gives spread between long term and short term t bill rates, exchage rate, balance of payment data, consumer price idnex, budget data either deficit or surplus, money supply m1, m2, m3. These things can be divided into exogenous or endogenous variables, factors that are either external or internal to the economy and see how these data affect the economy as a whole. I will give one example out of the many how to look at this data. If the inventory of manufactured goods is going up is higher than previous year it means the economy is cooling a little bit and there can be slow down in the economy which is bad for the stock market which is your question. All these variables point out to something or the other in the economy and clubbed together all those factors you will get a pretty good picture of the economy at any moment or it's future direction. Usually a single index won't help much except for non professional work. For professional work multiple regression equations are generated by Professionals or Academicians to forecast some of them as inputs to the other. The best resources are Federal Reserve website or Wall street Journal.