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:
- CPI
(Consumer Price Index)
- PPI
(Producer Price Index)
- Gross
Domestic Product (GDP)
- Employment
Report
- Housing
Starts
- Industrial
Production/Capacity Utilization
- National
Association of Purchasing Manager’s Index
- 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 15th 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 11th 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 16th 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 15th 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 11th 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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