top economic indicators explained

7/28/2019 Top Economic Indicators Explained

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TopEconomicIndicatorsExplained

Nearly every day of the week we hear the media discuss recent economic news and how it will impact the trading

day. Somehow the movements in the markets are always a result of positive or negative economic data that was

released that morning. Negative news gets the most attention from the media because people love to be pessimistic.

We feed on the terrible news and react irrationally when it is presented to us. A shrewd investor reads between the

lines and beyond the negative headlines to find the underlying trends and data within the news. Here’s an example:

the everyday individual will watch Good Morning America on Friday morning and hear that the Unemployment rate

unexpectedly increased to 9.1%. Oh no! GMA brings in their employment specialist and he/she breaks down the data

in a way that enthralls the viewer with numbers that are so terrible – we must be heading for a double dip recession!

What the specialist left out was the reason the rate increased was because an abnormally high number of people

joined the labor force, an indication that people are feeling more comfortable about the jobs market. Historically,

people will abandon the job search during a recession, since jobs are scarce, and then re-enter as the economy

improves and job openings appear. Therefore, although the rate hike to 9.1% is appalling, the increase in the labor

force is a sound indication of improvement in the coming months. Mainstream media will tend to leave out the good

news and capitalize on the bad – bad news sells! Never establish a stance on any piece of headline economic news

until you have had a chance to dig into the underlying data and analyze it for yourself.

So what is an economic indicator?

An economic indicator can be any form of data that may or may not have an impact on the current or future

movements in the economy and stock market. The economy can be viewed as a massive machine with numerous

moving parts that work together to drive it. These parts can be extremely complex and difficult to understand.

Knowing how they work together to power the machine is the key to harnessing its power and predicting its actions.

An investor should know the current status of these moving parts and how that will impact the direction and speed of the machine. The raw data, out of context, will not be useful.

These indicators can be categorized into three main groups: Leading, coincident and lagging.

The leading indicators tend to predict future events in the economy, while coincident indicators will usually confirm

current events or trends that are already under way. The final category, lagging indicators, tend to follow the

movements in the economy. They should authenticate trends that have already begun.



LeadingIndicators: JoblessClaims What is it? The Initial Jobless claims report comes out every Thursday morning at

8:30. The report shows the number of people filing (for the first time) for

jobless claims. The data is compiled by the U.S. Department of Labor and

is seasonally adjusted based on certain times of the year having abnormal

results due to holidays and the harvest season. Because the data comes

out every week, it can sometimes be quite volatile week to week;

therefore the release will always show the 4-week moving average. This

average will show a more steady indication of the trend in jobless claims.

Why do investors care?

Investors love to follow Initial jobless claims because the data is so

current. Coming out every week with the prior week’s data gives

investors a close to real-time indication of the jobs market. Large

movements in the report may give an indication for the employment data

that will be released the following month. Most of all, along with all other

employment data, the Initial Jobless Claims report gives an indication of

the strength or weakness in the jobs market. They know that if more

people are employed, then more people will have spending power. The

more people spend, the healthier the economy, as personal consumption makes up two-thirds of our GDP.

ConsumerConfidence What is it?

The consumer confidence index comes out at 10:00 am on the last Tuesday of every month. The data is maintained

by the Conference Board. Each month they send out a detailed survey to 5,000 random households around the

country. The survey asks pertinent questions on the current economic conditions and on future expectations of

economic conditions. The overall goal of the survey and ultimately the index is to gauge the attitudes of the everyday

consumer in the country. Because the index is based on survey results from Joe Shmoes around the country, and not

on hard statistical numbers, the data is highly subjective and distinct from all other economic indicators.

Why do Investors care?

Investors watch the consumer confidence index to gauge how the everyday American feels about the economy. Are

people pessimistic or optimistic? The report can be meaningful to investors when they are unsure of the direction of

the economy. If the survey results come back overwhelmingly positive, investors that were teetering on the edge of bearishness will be more inclined to stop selling and perhaps start buying equities. Because the everyday consumer

drives the economy, this report is a good indication of how willing that consumer is to buy a new home or new car

and stimulate economic growth. The subjectivity in the report comes from the notion that not everyone is an

economist, and the little things like movements in gas prices will have an overweighting in the confidence of the

consumer.



ExistingHomeSales What is it?

The Existing Home Sales report is released by the National Association of Realtors on the fourth week of every month

at 8:30 am for the previous month. The data tracks the

number of existing home sales that closed during themonth. There are a few other pieces of data that come

with the report, including median and average home sale

prices by region and inventory levels (the amount of

homes for sale in that month expressed through month’s

supply, or the number of months it would take for all

those homes to be sold at the current rate). This data is

seasonally adjusted for different times of the year, as

home sales tend to pick up in the summer months, and

decrease in the cold winter months. The mortgage rate is

usually included and the data includes condominiums.

Why do Investor’s care?

Existing home sales make up the majority of home sales in any given month (more than housing starts and new

home sales). Because of the large volumes in this data release, investors can rely on the numbers to get a sense of

the overall housing market. The housing market will tend to be more robust when the economy is expanding. A

strong housing market will have a ripple effect on many other areas of the economy as new homeowners will be

eager to buy new furniture, pave the driveway, hire a plumber, add some landscaping, or make any other number of

purchases that will put money back into the economy. Existing home sales are a leading indicator because of this

ripple effect leading to a strong economy and a strong stock market.

NewHomeSales What is it?

The New Home Sales report is released by the US Census

Bureau toward the end of every month at 10:00 am for

the previous month. A new home sale is tallied for every

contract signing (not closing) or deposit for a new home.

Keep in mind that the sale will be counted even if the

home has not even been built yet, or is only partially built.

Like other housing statistics, the New Home Sales report

includes both volume and price indications. This data is

seasonally adjusted for different times of the year, as

home sales tend to pick up in the summer months, and

decrease in the cold winter months.


Investors follow new home sales as they do other housing statistics. The New Home sales data should be considered

along with the others and not independently. Typically a contract is signed or a deposit is accepted one to two

months before the actual closing date, therefore this report will have a more leading indication of the housing market

than existing home sales. Like other housing indicators, the economic ripple effect is what makes the report so

momentous. Consumers will have to be incredibly financially comfortable to consider buying a home. They will tend



to have a positive outlook of their future income levels in order to afford and maintain the new home (or at least

they should!). Some say that new home sales have more of a significant role in the movement of the economy

because they can include the construction and the sale of a home. This coverage area impacts the construction and

building industry, furniture and other retailers, and all of the employees that help provide those services. Therefore

significant movements in this report can have an impact on housing companies, construction companies, and

miscellaneous retail companies.

HousingStarts

What is it?

The Housing Starts report is released by the US Census

Bureau around the middle of every month at 8:30 am for

the previous month. The release indicates the number of

homes for which ground was broken to begin construction

and for those that construction began on an existing

foundation. Along with the starts data, the release also

indicates how many building permits were applied for and

approved in the month. The data released in this report is

presented with both seasonally adjusted and non-

seasonally adjusted figures. Also helpful is how the data is

broken down by geographic region and by type of home

(single-family or multi-family).


Investors find housing starts and building permits to be incredibly predictive of future economic trends. Out of all the

housing market indicators, the housing starts report with the building permits component is the most forward lookingindicator of all other indicators. The builders around the country will have to be feeling quite confident in the real

estate markets and overall economy to apply for and start building a new home to sell. Just like the other housing

data, the ripple effect comes into play even more here. With several thousand starts happening every month, there is

great potential for additional consumption and income flowing into the economy. Think of all the items that will need

to be purchased to start a new home: appliances, lighting, lumber, landscaping, etc. The release of this report can

have an impact on the stocks of home building companies, home furnishing companies, retail and appliance

companies, as well as mortgage companies.



Coincident Indicators:RetailSales What is it?

The Retail Sales report is released by the US Census Bureau and the US Dept of Commerce around the middle of every month at 8:30 am for the previous month. The data shows the total dollar value of goods sold in the month,

and is broken down by different industries: Motor vehicle sales, apparel sales, electronics, gasoline, food, etc. Along

with the extensive industry breakdown, there are also seasonally adjusted figures in the release. Be prepared, this

release is notorious for significant revisions after the

initial release.


The retail sales data is one of the most telling coincident

indicators. Because consumer spending makes up over

66% of GDP it is a significant indication of where the

economy is heading. The more the consumer is spending

on cars, trucks, gasoline, clothes, food, and books, the

more profit and earnings large corporations will have.

Strong retail sales are a blessing to stock market

investors, but bond investors take caution. An increase in

sales can also mean an increase in prices. An increase in

prices can mean inflation, a phenomenon that will make

bond investors cringe. Therefore the balance between

economic growth and inflation is critically important to

investors. Many times the retail sales data will be compared to the Consumer Price index to show the impact of

inflation. Something important to note on this release is that the motor vehicle, gasoline, and food sales can be

volatile and/or have seasonal fluctuations. Many investors will look at the data ex-autos, or ex-food and energy, as

well as following monthly averages, year over year comparisons and seasonally adjust numbers to smooth out thisvolatility. Finally, this report can and will have a large impact on retail companies like Wal-Mart, Abercrombie & Fitch,

Amazon.com, and 99 Cents Only Stores. An investor should look at companies like these and see how they are

performing compared to their respective industries within the retail sales data.

PersonalIncomeWhat is it?

The Personal income and outlays report is released by the

Bureau of Economic Analysis (BEA) towards the end of

every month at 8:30 am for the previous month. As thetitle of the report signifies, there are two parts: personal

income (dollar value received) and personal outlays (dollar

value of expenditures). The personal income includes

nearly all forms of income a person can have. Personal

income, while primarily from the wages and salaries

component, can also be derived from pensions, social

security, dividends, interest, and rental income. The



personal outlays measurement includes consumption expenditures on durable goods, non-durable goods, and

services. These figures are shown with and without inflation adjustments and are presented in month over month

and year over year comparisons. Personal income does not include capital gains from sale of stocks.


Personal income plays a significant role in how much people spend. As with retail sales, which come out earlier in themonth, we know that consumer spending accounts for over 66% of GDP. With the average individual spending

approximately 95 cents of every $1.00 received, this data is critical in determining how much spending will take

place. If people are making more money, they will spend more money. Most importantly, inflation should be

considered when analyzing the data. Keep in mind that even if consumers don’t spend their income dollars, it is still

held at a bank in a savings account. The banks then use the money to lend and invest, indirectly pumping money

back into the economy.

IndustrialProduction What is it?

The Industrial Production report is released around the middle of every month by the Federal Reserve Board of

Governors at 9:15 am for the previous month. The release consists of two items, Industrial Production and Capacity

Utilization. Put simply, the report indicates the volume of goods being produced by factories, mines, and utilities.

Along with these main groups, there is further breakdown into specific sectors like electronics, motor vehicles, or

aircraft. The data is presented in month over month and year over year comparisons. The capacity utilization rate

shows how much of the factory capacity is being utilized and is released at the same time and with the same industry

and sector breakdowns.


Industrial production, unlike consumer consumption,

makes up a smaller portion (under 20%) of GDP. When

analyzing the data, it is important to distinguish which

areas were stronger/weaker than others. Investors benefit

from the detailed breakdown of sectors and industry

performance. Know that factories are producing more of

one item and less of another can help investors in asset

allocation and sector weighting decisions. The capacity

utilization rate is more of a concern to bond investors and

the Fed. A rate that is too high, usually anything over 85%, can be indicative of oncoming inflation. Therefore along

with bond investors, the Fed watches this report closely to help guide them on setting interest rate policies.



LaggingIndicators:PPI What is it?

The Producer Price Index is released by the Bureau of Labor Statistics around the middle of every month at 8:30

am for the previous month. The PPI is an index of prices

charged by wholesalers or producers. The data shows the

change in price of a basket of goods produced by

wholesalers month over month and year over year.

Because of the extreme volatility in the food and energy

component, the index is also presented without them. The PPI excluding food and energy is also called the core PPI

and tends to show smoother month to month transitions. In addition to the break out of food and energy, the index

shows the specific data for crude products, intermediate and finished goods. The data is released with seasonally and

non-seasonally adjusted figures.


An investor who tracks the movements in the PPI will be better positioned to react to future movements in the CPI.

It is advantageous to know what is going on at the producer level, because soon enough the producers will have to

pass on the inflated or deflated price pressures to the consumers. Secondarily, the PPI is a good indicator of the

movements in commodity prices, as producers primarily deal with raw and unfinished goods. Bond and stock

investors will be happy to see the PPI decline or post no change, as little to no inflation can mean low interest rates

and greater profit potential for companies. Although the core PPI is less volatile than the headline PPI (because of

the exclusion of food and energy) investors should still follow the complete/headline number. It is important to

remember that food and energy play a significant role in the economy and should not be excluded to simply make

the data easier to follow.

CPI What is it?

The Consumer Price Index is released by the Bureau of

Labor Statistics around the middle of the month at 8:30

am for the previous month. The CPI is presented in all the

same ways as the PPI only it follows price movements at

the consumer level instead of the producer level. The CPI

follows the changes in price of a fixed basket of goods

bought and used by the consumer. Examples of these

products include milk, eggs, gasoline, computers, cars,apparel, and services such as a visit to the barber shop. The report can be broken down by industry group, service

group, and commodity group as well as broken down by city or geographic regions. There is also a less-followed

version of the CPI called chain CPI, which is a chain-weighted index. The difference here is that it follows a variable

basket of goods instead of a fixed basket of goods. The benefit of the chained CPI is that it captures the changes in

choices of products purchased by the consumer. Following the variable basket of goods takes into consideration the

constant introduction of new and cheaper products into the markets that will impact the consumer’s buying

decisions.




Inflation is one of the most imperative economical phenomena for an investor to monitor. Although unpredictable at

times, the mere uncertainty and fear of it can have a significant impact on stocks and bonds. Upon the release of the

CPI data, markets will react accordingly. Because of the broad based utilization of the CPI data, investors should

constantly be aware of the CPI and how it will affect things like mortgage rates, car loans, treasury rates, taxes,

wages, and social security. The effect of inflation is best described by the $100 loan. If your friend asks to borrow$100 from you today and pay you back in one year with interest, how much interest do you charge him? Well, since

we know inflation exists and that $100 today will not be worth as much as $100 a year from now, you should at least

charge enough interest to make up for inflation. If inflation is currently at 2.5%, then you would have to charge him

at least 2.5% interest on the $100 loan (perhaps you should charge him a percent or two more for the possible

default risk and to make some $$ on the deal).

Employment SituationWhat is it?

The Employment Situation report is released by the Bureau

of Labor Statistics on the first Friday of every month at

8:30 am for the previous month. There are two parts to the

report, the establishment survey and the household survey.

The establishment survey reaches out to 440,000

businesses throughout the country and therefore has a

much less margin of error. This extensive survey compiles

statistics on payrolls, hours worked per week, and hourly

earnings for non-farm payrolls. The household survey has

somewhat of a larger diversification in its survey of over

60,000 households. This survey focuses on labor force statistics, employment statistics and unemployment statistics.

The survey includes the self-employed, unpaid family workers, farm workers, and private household workers, all of

which are unaccounted for in the Establishment survey. For the household survey, an unemployed individual issomeone who is currently without a job, but is actively applying and capable of work. Both surveys capture only the

data from a specific week in the previous month, usually the calendar week or pay period that contains the 12 th day

of the month. There are numerous other data points presented here as this is one of the most detailed economic

reports available.


Being one of the most headline newsworthy reports, investors pay close attention to the unemployment data. There

is no other report that is as indicative to the healthiness of the jobs market. Everyone including the investors on Wall

Street can understand the importance of having a job or looking for one, and therefore this report gets a lot of

attention and can cause significant movements in the market. The reports extensive data points give investors

copious amounts of economic indications for not only the jobs market, but the rest of the economy. Increasing

wages can point to wage inflation and is closely watched by the Fed. Increases in the workweek will be positive to

the stock market as it is an indication of increased productivity and a sign of future expansion in the economy. The

payroll numbers are the most followed figures. With more people working and receiving a paycheck, the greater the

possibility of them spending and stimulating the economy. In a stable and healthy economy, large increases in

payrolls can be negative to investors as this could be a sign of oncoming inflation. Too many people employed will

cause the demand for goods and services to spike, causing prices to spike, which will in turn cause inflation. Overall,

the monthly employment numbers are a sure indication of the strength in the economy because of the economic

ripple effect – more jobs = more earnings = more consumption = higher GDP.

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