US economic indicators by Darren Winters
Each month we real off a load of data regarding both the US economy and the UK economy. We also give you the dates of all of the reports that are due out in the coming month. Well we have been asked what are the most important ones and what do they mean. So here goes a layman’s guide to economic indicators!
Firstly I should explain why they are of any interest to the markets themselves. If you can imagine a country as being a company, then the economic results would equate to the fundamental analysis.
A healthy economy should be a good place for companies to expand. You need to have a strong workforce earning a reasonable wage paying taxes. Here you have created the end consumer, if they have money in their pockets they can buy the things they most need and then most want. Needs include food, clothes and shelter, wants may include cars, televisions, computers, property and holidays etc, etc.
So if consumers are buying, then companies are manufacturing, employing people who in turn are consumers. As you can imagine the more people that are employed, the more demand for goods and services and so the cycle begins.
To give you an idea of how important each indicator is, I have ranked them 1 to 5 with 1 being the most important and 5 the least.
Okay so the main measure of the economy is the gross domestic product ( GDP) rank level 2. This is the total value of the total economic output. The components include; consumption (the most important as it accounts for roughly two-thirds), investment, net exports, government purchases and inventories. It is released on a quarterly basis and can be quite volatile so the annualised figure is given more weight.
This figure can have quite an affect on the stock markets, particularly the first edition, later revisions are normally of little interest unless they are large.
Employment is key to having a healthy economy, there are a number of figures that are released in the US. These are
Retail sales (rank level 1), these are a measure of the total receipts of retail stores. They are often viewed excluding autos due to large monthly fluctuations, that is of course when it suits! It is worth looking at the components such as food and gas, changes here are more likely to be due to price rather than consumption.
Producer Price index (rank level 2), this is a measure of prices at the wholesale level. As with many reports this is made up of three others, these being crude, intermediate and finished. The latter is deemed most important as it is closest to the point of sale and thus is a indicator of potential inflation.
Consumer Price Index (rank level 2+), this is a measure of a basket of goods and services purchased by consumers. It is seen as the main inflation indicator and as in the UK forms part of cost of living adjustments. It is reported in two formats, one being the ‘core’ rate which excludes food and energy, the other being fully inclusive. The fed would prefer to use just the core figure as the price of food and particularly energy can be very volatile.
Industrial Production (rank level 2), this is an index of the physical output of the nation’s factories, mines and utilities. When looking at the results the market will take into account the utility production as it can be very volatile due to severe climate changes.
Housing Starts and Building Permits (rank level 2-), these two reports are released at the same time. The former is simply the number of residential units where construction has started in the month. Whereas the latter refers to the number of permits provided to allow excavation to start. Large swings in the numbers can affect the markets.
Durable Goods Orders (rank level 2), this is a measure of the amount of order for goods with a lifespan of a least three years. This can move the market but you have to look at the constituents as it includes aircraft and defence orders, both of which can slew the top level figure.
These are the main market movers along with interest rates and the muttering of Alan Greenspan, the Fed chairman. If you trade the US markets it is worth plotting the dates of these reports on a calendar.
An economy is much the same as a large company, the economic reports being equivalent to a companies fundamentals.
With most reports you should look at more than the headline figures as often there can be particular constituents that effect this.
Darren Winters
Firstly I should explain why they are of any interest to the markets themselves. If you can imagine a country as being a company, then the economic results would equate to the fundamental analysis.
A healthy economy should be a good place for companies to expand. You need to have a strong workforce earning a reasonable wage paying taxes. Here you have created the end consumer, if they have money in their pockets they can buy the things they most need and then most want. Needs include food, clothes and shelter, wants may include cars, televisions, computers, property and holidays etc, etc.
So if consumers are buying, then companies are manufacturing, employing people who in turn are consumers. As you can imagine the more people that are employed, the more demand for goods and services and so the cycle begins.
To give you an idea of how important each indicator is, I have ranked them 1 to 5 with 1 being the most important and 5 the least.
Okay so the main measure of the economy is the gross domestic product ( GDP) rank level 2. This is the total value of the total economic output. The components include; consumption (the most important as it accounts for roughly two-thirds), investment, net exports, government purchases and inventories. It is released on a quarterly basis and can be quite volatile so the annualised figure is given more weight.
This figure can have quite an affect on the stock markets, particularly the first edition, later revisions are normally of little interest unless they are large.
Employment is key to having a healthy economy, there are a number of figures that are released in the US. These are
- The employment report ( Rank level 1), this is made up of two reports, one that surveys 60,000
households, the other that surveys 375,000 businesses (known as the non-farm payrolls). The market
is most concerned with the result of the latter broader measure. - The average workweek (rank level 2), this is the number of hours worked. It is important as it gives an early indication of production and personal income.
- Average earnings (rank level 2-), this can be used as an indicator of potential inflation or deflation.
- Initial claims (Rank level 3), this is a measure of the number of filings for jobless benefits. These
numbers swing often wildly week to week, a move of more than 30,000 is normally seen as significant.
We believe they are often manipulated!
Retail sales (rank level 1), these are a measure of the total receipts of retail stores. They are often viewed excluding autos due to large monthly fluctuations, that is of course when it suits! It is worth looking at the components such as food and gas, changes here are more likely to be due to price rather than consumption.
Producer Price index (rank level 2), this is a measure of prices at the wholesale level. As with many reports this is made up of three others, these being crude, intermediate and finished. The latter is deemed most important as it is closest to the point of sale and thus is a indicator of potential inflation.
Consumer Price Index (rank level 2+), this is a measure of a basket of goods and services purchased by consumers. It is seen as the main inflation indicator and as in the UK forms part of cost of living adjustments. It is reported in two formats, one being the ‘core’ rate which excludes food and energy, the other being fully inclusive. The fed would prefer to use just the core figure as the price of food and particularly energy can be very volatile.
Industrial Production (rank level 2), this is an index of the physical output of the nation’s factories, mines and utilities. When looking at the results the market will take into account the utility production as it can be very volatile due to severe climate changes.
Housing Starts and Building Permits (rank level 2-), these two reports are released at the same time. The former is simply the number of residential units where construction has started in the month. Whereas the latter refers to the number of permits provided to allow excavation to start. Large swings in the numbers can affect the markets.
Durable Goods Orders (rank level 2), this is a measure of the amount of order for goods with a lifespan of a least three years. This can move the market but you have to look at the constituents as it includes aircraft and defence orders, both of which can slew the top level figure.
These are the main market movers along with interest rates and the muttering of Alan Greenspan, the Fed chairman. If you trade the US markets it is worth plotting the dates of these reports on a calendar.
An economy is much the same as a large company, the economic reports being equivalent to a companies fundamentals.
With most reports you should look at more than the headline figures as often there can be particular constituents that effect this.
Darren Winters
posted by Darren Winters at 12:15 PM
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