Economic Indicators
1. APICS SURVEY
A composite diffusion index of
national manufacturing conditions. This survey is less well known than the ISM,
but can also indicate trends in production. An index level of 50 means no
growth, but every 10 points signals gains of 4% in manufacturing.
Why do Investors Care?
Investors need to monitor the economy
closely because it usually dictates how various types of investments will
perform. The stock market likes to see healthy economic growth because that
translates to higher corporate profits. The bond market prefers less robust
growth and is extremely sensitive to whether the economy is growing too quickly,
which could set the stage for inflation.
The APICS survey gives a detailed look
at the manufacturing sector. The diffusion index does not move in tandem with
the ISM index every month, but sometimes the two do move in the same direction.
Since manufacturing is a major sector of the economy, investors can get a feel
for the general economic backdrop for various investments.
2. BANK RESERVE SETTLEMENT
Definition
A two-week period that ends every
other Wednesday during which commercial banks must meet reserve requirements
stipulated by the Federal Reserve.
Why do Investors Care?
This is primarily of interest to
institutional investors and securities brokers who deal with extremely
short-term financing (borrowing or lending) to meet cash management needs. For
example, short term rates such as the overnight lending rate might be pressured
upward by heavy demand for funds in the final few days of the Bank Reserve
Settlement period.
3. BUSINESS INVENTORIES
Definition
The dollar amount of inventories held
by manufacturers, wholesalers, and retailers. The level of inventories in
relation to sales is an important indicator of the near-term direction of
production activity.
Why do Investors Care?
Investors need to monitor the economy
closely because it usually dictates how various types of investments will
perform. The stock market likes to see healthy economic growth because that
translates to higher corporate profits. The bond market prefers more moderate
growth that won't generate inflationary pressures. Rising inventories can be an
indication of business optimism that sales will be growing in the coming months.
By looking at the ratio of inventories to sales, investors can see whether
production demands will expand or contract in the near future. For example, if
inventory growth lags sales growth, then manufacturers will have to boost
production lest commodity shortages occur. On the other hand, if unintended
inventory accumulation occurs (that is, sales do not meet expectations), then
production will probably have to slow while those inventories are worked down.
In this manner, the business inventory data provide a valuable forward-looking
tool for tracking the economy.
5. CONSTRUCTION SPENDING
Definition
The dollar value of new construction
activity on residential, non-residential, and public projects. Data are
available in nominal and real (inflation-adjusted) dollars.
Why do Investors Care?
Since the economic backdrop is the
most pervasive influence on financial markets, construction spending has a
direct bearing on stocks, bonds and commodities. In a more specific sense,
trends in the construction data carry valuable clues for the stocks of home
builders and large-scale construction contractors. Commodity prices such as
lumber are also very sensitive to housing industry trends. Businesses only put
money into the construction of new factories or offices when they are confident
that demand is strong enough to justify the expansion. The same goes for
individuals making the investment in a home. That's why construction spending is
a good indicator of the economy's momentum.
6. CONSUMER CONFIDENCE
Definition
A survey of consumer attitudes
concerning both the present situation as well as expectations regarding economic
conditions conducted by The Conference Board. Five thousand consumers across the
country are surveyed each month. The level of consumer confidence is directly
related to the strength of consumer spending.
Why do Investors Care?
Strong economic growth translates into
healthy corporate profits and higher stock prices. The bond market focus is
whether economic growth goes overboard and leads to inflation. Ideally, the
economy walks that fine line between strong growth and excessive (inflationary)
growth, which is what happened through much of the nineties. As a result,
investors in the stock and bond markets have enjoyed huge gains. If and when the
party comes to an end, more than likely a change in the economic trend will be
the culprit, and that change might be tipped off by a change in consumer
sentiment. Consumer spending accounts for two-thirds of the economy, so the
markets are always dying to know what consumers are up to and how they might
behave in the near future. The more confident consumers are about the economy
and their own personal finances, the more likely they are to spend. With this in
mind, it's easy to see how this index of consumer attitudes gives insight to the
direction of the economy. Just note that changes in consumer confidence and
retail sales don't move in tandem month by month.
7. CONSUMER CREDIT
Definition
The dollar value of consumer
installment credit outstanding. Changes in consumer credit indicate the state of
consumer finances and portends future spending patterns.
Why do Investors Care?
Growth in consumer credit can hold
positive or negative implications for the economy and markets. Economic activity
is stimulated when consumers borrow within their means to buy cars and other
major purchases. On the other hand, if consumers pile up too much debt relative
to their income levels, they may have to stop spending on new goods and services
just to pay off old debts. That could put a big dent in economic growth. The
demand for credit also has a direct bearing on interest rates. If the demand to
borrow money exceeds the supply of willing lenders, interest rates rise. If
credit demand falls and many willing lenders are fighting for customers, they
may offer lower interest rates to attract business.
Financial market players focus less
attention on this indicator because it is reported with a long lag relative to
other consumer information. Long term investors who do pay attention to this
report will have a greater understanding of consumer spending ability. This will
give them a lead on investment alternatives.
8. CONSUMER SENTIMENT
Definition
A survey of consumer attitudes
concerning both the present situation as well as expectations regarding economic
conditions conducted by the University of Michigan. Five hundred consumers are
surveyed each month. The level of consumer sentiment is directly related to the
strength of consumer spending.
Why do Investors Care?
Strong economic growth translates into
healthy corporate profits and higher stock prices. The bond market focus is
whether economic growth goes overboard and leads to inflation. Ideally, the
economy walks that fine line between strong growth and excessive (inflationary)
growth, which is what happened through much of the nineties. As a result,
investors in the stock and bond markets have enjoyed huge gains. If and when the
party comes to an end, more than likely a change in the economic trend will be
the culprit, and that change might be tipped off by a change in consumer
sentiment.
Consumer spending accounts for
two-thirds of the economy, so the markets are always dying to know what
consumers are up to and how they might behave in the near future. The more
confident consumers are about the economy and their own personal finances, the
more likely they are to spend. With this in mind, it's easy to see how this
index of consumer attitudes gives insight to the direction of the economy. Just
note that changes in consumer sentiment and retail sales don't move in tandem
month by month.
9. CPI (Consumer Price Index)
Definition
The Consumer Price Index is a measure
of the average price level of a fixed basket of goods and services purchased by
consumers. Monthly changes in the CPI represent the rate of inflation.
Why do Investors Care?
The consumer price index is the most
widely followed indicator of inflation in the United States. Just knowing what
inflation is and how it influences the markets can put an individual investor
head and shoulders above the crowd.
Inflation is a general increase in the price of goods and services. The
relationship between INFLATION and INTEREST RATES is the key to understanding
how data like the CPI influence the markets ( and your investments.)
If someone borrows $100 dollars from
you today and promises to repay it in one year with interest, how much interest
should you charge? The answer depends largely on inflation, because you know
that the $100 won't be able to buy the same amount of goods and services a year
from now, as it does today. If you were in Brazil where prices can double every
couple of months, you might want to charge 400% interest for a total payoff of
$500 at the end of the year. In the United States, the CPI tells us that prices
are rising about 2% a year, so you only have to charge 2% interest to recoup
your purchasing power at the end of the year. You might want to add in a few
more percentage points for default risk and the opportunity cost, but the key
variable in what interest rate you charge is the rate of inflation.
That basically explains how interest
rates are set on everything from your mortgage and auto loans to Treasury bonds
and T-bills. As the rate of inflation changes and as expectations on inflation
change, the markets adjust interest rates accordingly. The effect ripples across
stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.
By tracking the trends in inflation, whether high or low, rising or falling,
investors can anticipate how different types of investments will perform
10. CURRENT ACCOUNT
Definition
A measure of the country's
international trade balance in goods, services, and unilateral transfers. The
level of the current account, as well as trends in exports and imports, are
followed as indicators of trends in foreign trade.
Why do Investors Care?
U.S. trade with foreign countries hold
important clues to economic trends here and abroad. The data can directly impact
all the financial markets, but especially the foreign exchange value of the
dollar. The dollar can be particularly sensitive to changes in the chronic trade
deficit run by the United States since this trade imbalance creates greater
demand for foreign currencies. The bond market is sensitive to the risk of
importing inflation or deflation. Ever since Asian economies collapsed at the
end of 1997, financial market participants have feared that deflation in these
economies would be transported to the United States. The linkage is not so
direct, and deflationary pressures are not so likely at this time.
11. DURABLE GOODS ORDERS
Definition
Durable goods orders reflect the new
orders placed with domestic manufacturers for immediate and future delivery of
factory hard goods.
Why do Investors Care?
Investors want to keep their finger on
the pulse of the economy because it usually dictates how various types of
investments will perform. The stock market likes to see healthy economic growth
because that translates to higher corporate profits. The bond market doesn't
mind growth but is extremely sensitive to whether the economy is growing too
quickly and paving the road for inflation. By tracking economic data like
durable goods orders, investors will know what the economic backdrop is for
these markets and their portfolios. Orders for durable goods show how busy
factories will be in the months to come, as manufacturers work to fill those
orders. The data not only provides insight to demand for things like
refrigerators and cars, but also business investment going forward. If companies
commit to spending more on equipment and other capital, they are obviously
experiencing sustainable growth in their business. Increased expenditures on
investment goods sets the stage for greater productive capacity in the country
and reduces the prospects for inflation. That tells investors what to expect
from the manufacturing sector, a major component of the economy and therefore a
major influence on their investments.
12. EXISTING HOME SALES
Definition
The number of previously constructed
homes with a closed sale during the month. Existing homes (also known as home
resales) are a larger share of the market than new homes and indicate housing
market trends.
Why do Investors Care?
This provides a gauge of not only the
demand for housing, but the economic momentum. People have to be feeling pretty
comfortable and confident in their own financial position to buy a house.
Furthermore, this narrow piece of data has a powerful multiplier effect through
the economy, and therefore across the markets and your investments. By tracking
economic data such as home resales, investors can gain specific investment ideas
as well as broad guidance for managing a portfolio. Even though home resales
don't always create new output, once the home is sold, it generates revenues for
the realtor. It brings a myriad of consumption opportunities for the buyer.
Refrigerators, washers, dryers and furniture are just a few items home buyers
might purchase. The economic "ripple effect" can be substantial especially when
you think a hundred thousand new households around the country are doing this
every month. Since the economic backdrop is the most pervasive influence on
financial markets, home resales have a direct bearing on stocks, bonds and
commodities. In a more specific sense, trends in the existing home sales data
carry valuable clues for the stocks of home builders, mortgage lenders and home
furnishings companies.
13. FACTORY ORDERS
Definition
The dollar level of new orders for
manufacturing durable and nondurable goods. It gives more complete information
than durable goods orders which is reported one or two weeks earlier in the
month.
Why do Investors Care?
Investors want to keep their finger on
the pulse of the economy because it usually dictates how various types of
investments will perform. The stock market likes to see healthy economic growth
because that translates to higher corporate profits. The bond market prefers
more moderate growth which is less likely to cause inflationary pressures. By
tracking economic data like factory orders, investors will know what the
economic backdrop is for these markets and their portfolios. The orders data
show how busy factories will be in coming months as manufacturers work to fill
those orders. This report provides insight to the demand for not only hard goods
such as refrigerators and cars, but nondurable such as cigarettes and apparel.
In addition to new orders, analysts monitor unfilled orders, an indicator of the
backlog in production. Shipments reveal current sales. Inventories give a handle
on the strength of current and future production. All in all, this report tells
investors what to expect from the manufacturing sector, a major component of the
economy and therefore a major influence on their investments.
15. HICP (Harmonized Index of
Consumer Prices)
What is the harmonized index of
consumer prices?
The harmonized index of consumer
prices (HICP) is an internationally comparable measure of inflation calculated
by each Member State of the European Union. HICPs are used to compare inflation
rates across the European Union. Since January 1999, they have been used by the
European Central Bank as the target measure of inflation for the Member States
of the Eurozone. Increasingly, HICPs are being used for indexing contracts which
cover more than one EU Member State.
Why were they developed?
National consumer price indices within
Europe, such as the RPI, vary considerably in terms of their coverage of goods
and services and in the rules underlying their construction. This can impact on
the measured rates of inflation. In response to this, and as a requirement of
the Maastricht Treaty, Eurostat - the statistical office of the European Union -
in conjunction with the National Statistical Offices of EU Member States,
developed the HICP as a comparable measure of inflation. HICP inflation rates
for all Member States are available from January 1997.
How is the HICP different from the RPI?
Although, the same price data are used
for both HICP and RPI and the methodologies used are similar, the rules
underlying the construction of the HICP are specified in a series of European
Regulations and it differs from the RPI in the following ways: - In the HICP,
the geometric mean is used to aggregate the prices at the most basic level
whereas the RPI uses arithmetic means. - A number of RPI series are excluded
from the HICP, most particularly, those mainly relating to owner occupiers’
housing costs (eg mortgage interest payments, house depreciation, council tax
and buildings insurance).
- The coverage of the HICP indices is
based on the international classification system, COICOP which differs from the
RPI groupings.
- The HICP includes series for air
fares, university accommodation fees, foreign students’ university tuition fees,
unit trust and stockbrokers charges, none of which are included in the RPI.
- The index for new cars in the RPI is
imputed from movements in second hand car prices, whereas the HICP uses a
quality adjusted index based on published prices of new cars.
- The HICP weights are based on
expenditure by all private households, foreign visitors to the UK and residents
of institutional households. In the RPI, weights are based on expenditure by
private households only, excluding the highest income households, institutional
households and pensioner households mainly dependent on state benefits.
- In the construction of the RPI
weights, expenditure on insurance is assigned to the relevant insurance heading.
For the HICP weights, the amount paid out in insurance claims is distributed
amongst the COICOP headings according to the nature of the claims expenditure
with the residual (ie the service charge) being allocated to the relevant
insurance heading amongst the COICOP headings according to the nature of the
claims expenditure with the residual (ie the service charge) being allocated to
the relevant insurance heading. amongst the COICOP headings according to the
nature of the claims expenditure with the residual (ie the service charge) being
allocated to the relevant insurance heading.
16. HOUSING STARTS
Definition
Housing starts measure the number of
residential units on which construction is begun each month.
Why do Investors Care?
Two words...Ripple Effect. This narrow
piece of data has a powerful multiplier effect through the economy, and
therefore across the markets and your investments. By tracking economic data
such as housing starts, investors can gain specific investment ideas as well as
broad guidance for managing a portfolio. Home builders don't start a house
unless they are fairly confident it will sell upon or before its completion.
Changes in the rate of housing starts tell us a lot about demand for homes and
the outlook for the construction industry. Furthermore, each time a new home is
started, construction employment rises, and income will be pumped back into the
economy. Once the home is sold, it generates revenues for the home builder and a
myriad of consumption opportunities for the buyer. Refrigerators, washers and
dryers, furniture, and landscaping are just a few things new home buyers might
spend money on, so the economic "ripple effect" can be substantial especially
when you think of it in terms of a hundred thousand new households around the
country doing this every month.
Since the economic backdrop is the
most pervasive influence on financial markets, housing starts have a direct
bearing on stocks, bonds and commodities. In a more specific sense, trends in
the housing starts data carry valuable clues for the stocks of home builders,
mortgage lenders, and home furnishings companies. Commodity prices such as
lumber are also very sensitive to housing industry trends.
17. IFO Business Climate in industry
and trade
The Ifo Business Climate Index is a
widely observed early indicator for economic development in Germany. Every month
the Ifo Institute surveys more than 7,000 enterprises in west and east Germany
on their appraisals of the business situation ('good' / 'satisfactory' / 'poor')
and their expectations for the next six months ('better' / 'same' / 'worse').
The replies are weighted according to the importance of the industry and
aggregated. The percentage shares of the positive and negative responses to both
questions are balanced, and a geometric mean is formed from the balances,
divided according to east and west Germany. The series of balances thus derived
are linked to a base year (currently 1991) and seasonally adjusted.
In addition to the index values, the Ifo Institute also published the original
balances of the Ifo Business Climate.
The Ifo Business Climate balances can
fluctuate between extreme values of -100 (i.e., all responding firms appraise
their situation as poor or expect business to become worse) and +100 (i.e., all
responding firms assessed their situation as good or expect an improvement in
their business). In actual fact, the balances fluctuate around the zero value,
the fluctuations being considerably smaller (even the negative ones) than the
index values, which start from a base of 100.
An example to illustrate how the
balance values are calculated:
Of 100 responding firms, 40% appraise
their business situation as satisfactory, 35% as good and 25% as poor. The firms
that assessed their situation as satisfactory are considered to be "neutral" and
do not affect the results of the business-situation appraisal. The two remaining
percentage values (35 - 25) are now balanced. The resulting value of 10 is the
business-situation appraisal, i.e. the first component of the business climate
in the form of a balance. The six-month expectations are calculated the same
way. When this value has been determined, the geometric mean is formed from the
situation and expectations appraisal. This geometric mean is the Ifo Business
Climate balance for the individual month.
18. IMPORT AND EXPORT PRICES
Definition
The prices of goods that are bought in
the United States but produced abroad and the prices of goods sold abroad but
produced domestically. These prices indicate inflationary trends in
internationally traded products.
Why do Investors Care?
Changes in import and export prices
are a valuable gauge of inflation here and abroad. Furthermore, the data can
directly impact the financial markets such as bonds and the dollar. The bond
market is especially sensitive to the risk of importing inflation because it
erodes the value of the principal (the original investment) which is paid back
when the bond matures. It also decreases the value of the steady stream of
interest rate payments on this type of security. Inflation leads to higher
interest rates and that's bad news for stocks, as well. By monitoring inflation
gauges such as import prices, investors can keep an eye on this menace to their
portfolio.
19. INDUSTRIAL PRODUCTION AND
CAPACITY UTILIZATION
Definition
The Index of Industrial Production is
a chain-weight measure of the physical output of the nation's factories, mines
and utilities. The capacity utilization rate reflects the usage of available
resources.
Why do Investors Care?
Investors want to keep their finger on
the pulse of the economy because it usually dictates how various types of
investments will perform. The stock market likes to see healthy economic growth
because that translates to higher corporate profits. The bond market prefers
more subdued growth that won't lead to inflationary pressures. By tracking
economic data like industrial production, investors will know what the economic
backdrop is for these markets and their portfolios. Industrial production shows
how much factories, mines and utilities are producing. Since the manufacturing
sector accounts for one-quarter of the economy, this report has a big influence
on market behavior. The capacity utilization rate provides an estimate of how
much factory capacity is in use. If the utilization rate gets too high (above
85%) it can lead to inflationary bottlenecks in production. The Federal Reserve
watches this report closely and sets interest rate policy on the basis of
whether production constraints are threatening to cause inflationary pressures.
As such, the bond market can be highly sensitive to this report.
20. INTERNATIONAL TRADE
Definition
International Trade measures the
difference between imports and exports of both tangible goods and services. The
level of the international trade balance, as well as changes in exports and
imports, indicate trends in foreign trade.
Why do Investors Care?
Changes in the level of imports and
exports, along with the difference between the two (the trade balance) are a
valuable gauge of economic trends here and abroad. Furthermore, the data can
directly impact all the financial markets, but especially the foreign exchange
value of the dollar.
Imports indicate demand for foreign
goods and services here in the U.S. Exports show the demand for U.S. goods in
overseas countries. The dollar can be particularly sensitive to changes in the
chronic trade deficit run by the United States, since this trade imbalance
creates greater demand for foreign currencies. The bond market is also sensitive
to the risk of importing inflation. This report gives a breakdown of U.S. trade
with major countries as well, so it can be instructive for investors who are
interested in diversifying globally. For example, a trend of accelerating
exports to a particular country might signal economic strength and investment
opportunities in that country.
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