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How the Economy Works: An Investor's Guide to Tracking the Economy

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How the Economy Works is Edmund Mennis' successful book on understanding macroeconomic data. The book's subtitle, An Investor's Guide to Tracking the Economy, aptly describes one use of the book. It also provides an excellent source of information for anyone to use in following and anticipating changes in the economy.

If a picture is worth a thousand words, this book is a mini-encyclopedia of economic understanding, because of more than eighty time-series graphs plus numerous tables it contains. The graphs are used extensively, with each economic concept being explained within the context of a graphic display of the data. The explanations refer to the graphs and relate current economic conditions to historical patterns. The book is unique in that a beginning investor who wants a deeper understanding of how the economy works can read it. The professional economist also can use it for clear explanations that can be given to non-economists.

The first chapter provides an explanation of gross domestic product (GDP). It covers both the input and output methods of calculation, introducing the reader to the differences between nominal and real measures of economic activity. The chapter on measuring price changes not only covers what causes changes in the reported indices but also what aspects are not covered or measured.

Three major chapters are devoted to GDP components that can be used to track consumer behavior and changes in the business and government sectors. The coverage is wide in the sense that it covers not only income, spending and employment, but it also covers consumer saving and attitudes as measured by consumer confidence indicies. The chapters on business and government are equally extensive. I found the sections on state and local government, the federal deficit and debt, plus the one on financing Social Security to be most interesting, especially in the context of current events.

As one might expect from an economist with extensive banking experience, the chapter on interest rates and monetary policy is extensive and well done. It begins by answering the question, "What are interest rates?" Later, the fractional reserve banking system and bank money creation are also explained. The chapter, like the book, covers much more than just the basics. One example is the section that begins with the basics of watching the Federal Reserve and progresses to bond maturity spreads, bond quality spreads and concludes with the use of federal funds futures to anticipate Federal Reserve actions.

There are other chapters on tracking the economy using monthly data to identify economic trends and cycles as well as sections on understanding the pitfalls on blindly using the data presented by the media and the pundits. The book also has a bonus chapter written by Liam Mennis that presents a thorough introduction to using the Internet to track the economy. In the future more people will be using the net for all purposes, including tracking the economy. This chapter provides valuable information and sources on where to obtain data and analyses via the net.

There are two additional bonuses in the book. One bonus is the excellent chapter on profits. The author is a well-known expert on the economics of profits, and this chapter is a detailed treatment of the subject. The chapter begins with an almost intuitive discussion of shareholder profits and moves to complex concepts used in the national income accounts. It details why "operating profits" are a better measure of underlying corporate profitability than several of the alternatives. The book delivers an in-depth treatment of the subject, including the relationship between output, hours worked and productivity in the context of understanding corporate profits and their impact on the economy.

The final bonus is the chapter on suggestions for the individual investor. It begins with a discussion of investment objectives and financial goal setting. We are advised to set an absolute rate of return for our own portfolio to meet our specific objectives and to examine that rate of return to see if it is realistic. To aid our work in determining realism, the long-term returns on several financial investments are displayed. Along with this presentation, the concepts of risk and diversification are presented in an intuitive and nonmathematical discussion. The chapter concludes with an enlightening explanation of many commonly presented but rarely understood stock market averages.

The book will be useful to professional economists and investors to remind them of concepts they deal with every day but find difficult to explain in technically correct but easy to understand language. It also will be valuable to those who will be introduced to these concepts for the first time. The presentation and language are at a professional level and should be much more acceptable to adults than typical textbooks.

Gerald L. Musgrave, Economics America, Inc.

How the Economy Works by Ed Mennis is a refreshingly concise and easy to read guide on one of the most complicated subjects of our era: U.S. and International Economics. Most books I have read on this subject are usually dry, too long and written with so much jargon/slang that I cannot understand what the author is trying to say (and I work professionally in the financial services industry). Mennis breaks down his book into easily digestible, short chapters laden with pictures and graphs that enhance its readability and the reader's content retention.

In this book you will find excellent explanations of economic trends and cycles, interest rate and monetary policy, consumer and corporate spending, corporate profit cycles and Federal Reserve activity. It concludes with a wonderful chapter on how individuals can APPLY these principles (which is usually missing from most financial books).

In the end, I found How the Economy Works to be a superb economic reference guide. The professional economist and individual investor will not regret buying this book.

NOTE: If you are looking for a book that goes into greater detail about economic indicators only, take a look at `The Atlas of Economic Indicators' by Carnes and Slifer.

Most of the data in this book ends no later than 1998, so shows everything trending merrily upward. Not the author's fault, of course, and you could update it yourself if you've got lots of free time, a highbandwidth Internet connection, access to an excellent library and money for some subscriptions. Otherwise, an update to show the bubble and bust would be most helpful.

But a good book to read if looking for a start at understanding the sources of and connections between the various economic indices and data that are so glibly thrown about in both the popular and financial media.

The average person does not know much about the U.S. economy, even though they are connected to it everyday. Mr. Mennis' book, How the Economy Works, takes this complex subject down to the average readers skill, and takes them step by step through each aspect of it. I was galvanised by the way Mennis used graphs and charts to back up his text. It was very refreshing to see this, because in school, they explain, but never show you how it works in life. If you want to major in business this would be a great book for you. Mr. Mennis tells about starting up a new business and how to work the stock market, so it doesn't work you. Mennis believes that the five best ideas for understanding investments are listing specific goals, how to meet these goals, set an absolute rate of return so you can see it your goal is realistic, a time in which to measure your results and to determine the risks involved before getting into a situation you can't get out of. If you still want more info buy the book, it's a great way to learn about the U.S. Economy.

I was not very impressed with this book. My background is that I am familiar with stock market basics but needed a better understanding of how economic indicators that are often reported in the Wall Street Journal play into the stock market. For instance, people seem to write a lot about the jobs report and I never understood all of the ramifications of this indicator. How the Economy Works doesn't say anything about the jobs report.

The descriptions of various aspects of the economy weren't documented as thoroughly as I would have liked either. As a specific example of this, I was familiar with the basic idea of GDP but didn't understand all of the details. How the Economy Works broke down the components that make up the GDP but did not explain why certain components were necessary, such as "changes in business inventory." In other words, what was the rationale for including changes in business inventory as a component of the GDP? You would never find out by reading this book. You would only know it's in there. I didn't find my economic confusion cleared up very much with this book.

I later purchased The Secrets of Economic Indicators (ISBN: 0-13-145501-X) from Amazon and found this book much more clear, factual, and in depth. In chapter 3 they covered the jobs report as "the most eagerly awaited news on the economy". The GDP description was very clear in comparison to How the Economy Works, and much more thorough.

My recommendation would be to go with another book if you are interested in really understanding the various aspects of the economy. However, How the Economy Works might be useful for people who feel overwhelmed and just need a good overview of the different aspects of the economy.

this is the handiest book i've found that provides organized historical economic data and information where to find more past and present data. it is a great introduction to understanding what all the data really means that is published on a regular basis.

This is an excellent book for those beginning a study of real world economics. There are plenty of charts and clear explanations of how the Economy's pieces fit together. I have used it in several courses and can report that my students have found it very helpful.

A big problem with this book is the title. The book should have been titled "An Introduction to Economic Data that Impact Investments".

The unstated premise of this book is that you must understand and follow scores of economic indexes to make profitable investments. If you agree with that premise, this book is for you.

I tend to think that making money on the stock/bond markets requires more than just understanding economics. Whatever that is, you will not find it in this book.