Within each month the release of key economic data can certainly make an impact on the financial markets. If the data released is in line with expectations, it could be a non-event. If the release in not in line with expectations, it can turn things upside-down. In this lesson, I will introduce you to some of the most important economic indicators. In addition, I will show you how to interpret the data as well as how you can trade off the data.

Economic indicators and reports such as the CPI, PPI, and the unemployment report are gauges or tools that tell you about the health of the economy. They tell you about the strength and condition of the economy. They can also hint towards the future of the economy. There are number of economic indicators/data that are released each month. The following are what I view to be the most important indicators:

1. CPI (Consumer Price Index)
2. PPI (Producer Price Index)
3. Gross Domestic Product (GDP)
4. Employment Report
5. Housing Starts
6. Industrial Production/Capacity Utilization
7. National Association of Purchasing Manager’s Index
8. Retail Sales

Consumer Price Index (CPI)

What it is: The Consumer Price Index (CPI) is a measure of the change in prices paid by consumers for a fixed basket of goods and services. The CPI compares the price-level changes in a basket of goods and services from month-to-month or year-to-year. It is one of the most important economic indicators, since it is one of the most widely followed measures of inflation.

What it says: The CPI tells you whether goods and services are becoming cheaper or more expensive. In other words, it tells you about the purchasing power of your money.

Timing of releases: Monthly, approximately the 15^th of each month. Data released is for the previous month.

What to look for: Look at changes in the “Core” CPI, which is the CPI without food and energy. Oftentimes, the Core CPI is looked at more than the regular CPI. This is due to the high volatility in food and energy prices. Any signs of inflation.

Impact on stock market: An increase in the CPI would indicate an increase in inflation. Therefore, it would be bad for the stock market. A decrease in the CPI would be good for the stock market, since it would indicate that inflation is under control.

Producer Price Index (PPI)

What it is: The Producer Price Index (PPI) is a group of indexes that measure changes in the selling prices received by domestic producers of goods and services. The PPI measures price changes from the perspective of the producer or seller.

What it says: It tells you about price changes at the wholesale level.

Timing of releases: Monthly, approximately the 11^th of every month. Data released is for the previous month.

What to look for: Any signs of rising inflation. Since the PPI is released several days ahead of the CPI, it can be an early warning of pricing pressures on the consumer side. Also, much like the CPI, focus on the Core PPI since it provides a better picture of underlying inflation.

Impact on stock market: Just like the CPI, an increase in the PPI would indicate rising inflation and therefore a declining stock market. A decrease in the PPI would indicate that inflation is on the decline and therefore a rising stock market.

Gross Domestic Product (GDP)

What it is: Gross Domestic Product is the broadest measure of the health of the U.S. economy. It measures the total value of all goods and services produced and consumed in the U.S. The percentage change in GDP shows us the growth rate of the U.S. economy.

What it says: Tells you whether the economy is growing or not.

Timing of releases: Monthly, though GDP is actually a quarterly figure. Each month an initial estimate is released.

What to look for: Sharp rise or decline in inventories. Determine whether this is due to an increase or decrease in demand.

Impact on stock market: An increase in GDP would point to a rising stock market, while a decrease in GDP would point to a declining stock market.

Employment Report

What it is: Perhaps the most important economic report monitored by the financial markets. It’s usually the first major economic release each month. It is comprised of two reports: one produces the unemployment rate, the other produces the nonfarm payroll report, average workweek, and average hourly earnings.

What does it say: What percentage of people are unemployed? Are workers working longer hours? Are workers getting paid more?

Timing of releases: Monthly, data is for the previous month. Each release is usually at the beginning of each month.

What to look for: Total changes in payroll employment. Changes in average hourly earnings and total hours worked. Unemployment rate compared to various historical periods.

Impact on stock market: An increase in payroll employment would mean a rising stock market, while a decrease in payroll employment would mean a declining stock market. An increase in the unemployment rate would mean a declining stock market, while a decrease in the unemployment rate would mean a rising stock market.

Housing Starts

What it is: An indicator that tracks the construction of new single-family homes, townhouses, and buildings. It is a leading indicator of future economic activity. Housing starts is really an all-encompassing indicator that ties in with many other economic issues.

What it says: Tells you about the number of new homes that are being built.

Timing of releases: Monthly, approximately the 16^th of each much. The data is of prior two months.

What to look for: Besides the number of new homes that are being built, housing starts can give you insights into interest/mortgage rates and consumer confidence. An increase in housing starts also increases demand for furniture and appliances. It is usually the first indicator to turn down, when the economy goes into recession. It is also the first to rise when the economy rebounds.

Impact on stock market: An increase in housing starts would mean a rising stock market. A decrease in housing starts would mean a declining stock market.

Industrial Production/Capacity Utilization

What it is: Industrial production (IP) is a two-part report which includes capacity utilization. Industrial production is a measure of the physical output of the nation’s factories, mines, and utilities.

What it says: Tells you about the about what is happening in the manufacturing sector.

Timing of releases: Monthly, released around the 15^th of each month. Data is for the previous month.

What to look for: Production trends across different industries. Changes in capacity utilization can suggest changes in producer prices and consumer prices.

Impact on stock market: An increase in Industrial Production and Capacity Utilization would mean a rising stock market. A decrease in Industrial Production and Capacity Utilization would mean a declining stock market.

Purchasing Managers’ Index (NAPM)

What it is: An index based on surveys of 300 purchasing managers in different industries nationwide.

What it says: Tells you about the strength of the manufacturing sector.

Timing of releases: Monthly, on the first business day of the month. Data is for the previous month.

What to look for: Turning points in the index which could suggest an increase or decrease in economic activity. An index value of 50 and above indicates expansion in the manufacturing sector, while an index value below 50 suggests a contraction in the manufacturing sector.

Impact on stock market: The stock market is very sensitive to unexpected changes in the index. An increasing in the NAPM suggests a rising stock market and a decrease in the NAPM suggest a declining stock market.

Retail Sales Report

What it is: A report on the sale of merchandise for cash or credit.

What it says: Tells you what consumers are up to. Are consumers buying?

Timing of releases: Monthly, approximately the 11^th of every month.

What to look for: Patterns in consumer spending.

Impact on stock market: The stock market is highly sensitive to retail sales. An increase in retail sales suggests a rising stock market while a decrease in retail sales suggests a declining stock market.

Studying economic indicators can be very beneficial to your trading, as it can help you gain a deeper understanding of the economy and the business cycle. It can also help you determine the health and future direction of the economy in relation to the current economic conditions. For trading purposes, the most important thing to know about economic indicators is whether or not the numbers meet market expectations.

Since the majority of releases are announced during pre-market hours, tension is often thick at the starting gate. Once the gate is opened, the markets will begin to digest the news. The release is usually assimilated quickly, but sometimes it can take a while for the market to digest the news. In addition, prior to certain releases, market behavior changes in anticipation. The best way to prepare for economic releases would be to look at their historical changes in relation to the underlying business cycle. Although this is easier said than done, it can help you a great deal in your trading and your understanding of the markets.

Mark Boucher has developed strategies for timing and predicting long-term market action using economic indicators. To learn those strategies, click here.

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