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Economic
Indicators 101 courtesy
Economic indicators are snippets of financial
and economic data published by various agencies of the government or
private sector. These statistics, which are made public on a regularly
scheduled basis, help market observers monitor the pulse of the economy.
Therefore, they are religiously followed by almost everyone in the financial
markets. With so many people poised to react to the same information,
economic indicators in general have tremendous potential to generate
volume and to move prices in the markets. While on the surface it might
seem that an advanced degree in economics would come in handy to analyze
and then trade on the glut of information contained in these economic
indicators, a few simple guidelines are all that is necessary to track,
organize and make trading decisions based on the data.
Know exactly when each economic
indicator is due to be released. Keep a calendar on your
desk or trading station that contains the date and time when each stat
will be made public. You can find these calendars on the N.Y. Federal
Reserve Bank Web site using this link
http://www.ny.frb.org/,
and then by searching for "economic indicators." The same information
is also available on many other sources on the Web or from the company
you use to execute your trades.
Keeping track
of the calendar of economic indicators will also help you make sense
out of otherwise unanticipated price action in the market.
Consider this scenario: it's Monday morning and the USD has been
in a tailspin for three weeks. As such, it's safe to assume that many
traders are holding large short USD positions. However, on Friday the
employment data for the
U.S.
is due to be released. It is very likely that with this key piece of
economic information soon to be made public, the USD could experience
a short-term rally leading up to the data on Friday as traders pare
down their short positions. The point here is that economic indicators
can effect prices directly (following their release to the public) or
indirectly (as traders massage their positions in anticipation of the
data.)
Understand
what particular aspect of the economy is being revealed in the data.
For example, you should know which indicators measure the growth of
the economy (GDP) vs. those that measure inflation (PPI, CPI) or employment
(non-farm payrolls). After you follow the data for a while, you'll become
very familiar with the nuances of each economic indicator and what part
of the economy they are measuring.
Not all economic
indicators are created equal. Well, they might've been created
with equal importance but along the way, some have acquired much greater
potential to move the markets than others. Market participants will
place higher regard on one stat vs. another depending on the state of
the economy.
Know which
indicators the markets are keying on. For example, if prices
(inflation) are not a crucial issue for a particular country, inflation
data will probably not be as keenly anticipated or reacted to by the
markets. On the other hand, if economic growth is a vexing problem,
changes in employment data or GDP will be eagerly anticipated and could
precipitate tremendous volatility following their release.
The data itself
is not as important as whether or not it falls within market expectations.
Besides knowing when all the data will hit the wires, it is vitally
important that you know what economists and other market pundits are
forecasting for each indicator. For example, knowing the economic consequences
of an unexpected monthly rise of 0.3% in the producer price index (PPI)
is not nearly as vital to your short-term trading decisions as it is
to know that this month the market was looking for PPI to fall by 0.1%.
As mentioned, you should know that PPI measures prices and that an unexpected
rise could be a sign of inflation. But analyzing the longer-term ramifications
of this unexpected monthly rise in prices can wait until after you've
taken advantage of the trading opportunities presented by the data.
Once again, market expectations for all economic releases are published
on various sources on the Web and you should post these expectations
on your calendar along with the release date of the indicator.
Don't get
caught up in the headlines. Part of getting a handle on what
the market is forecasting for various economic indicators is knowing
the key aspects of each indicator. While your macroeconomics professor
might have drilled the significance of the unemployment rate into your
head, even junior traders can tell you that the headline figure is for
amateurs and that the most closely watched detail in the payroll data
is the non-farm payrolls figure. Other economic indicators are similar
in that the headline figure is not nearly as closely watched as the
finer points of the data. PPI for example, measures changes in producer
prices. But the stat most closely watched by the markets is PPI, ex-food
and energy. Traders know that the food and energy component of the data
is much too volatile and subject to revisions on a month-to-month basis
to provide an accurate reading on the changes in producer prices.
Speaking of
revisions, don't be too quick to pull that trigger
should a particular economic indicator fall outside of market expectations.
Contained in each new economic indicator released to the public are
revisions to previously released data. For example, if durable goods
should rise by 0.5% in the current month, while the market is anticipating
them to fall, the unexpected rise could be the result of a downward
revision to the prior month. Look at revisions to older data because
in this case, the previous month's durable goods figure might've been
originally reported as a rise of 0.5% but now, along with the new figures,
is being revised lower to say a rise of only 0.1% Therefore, the unexpected
rise in the current month is likely the result of a downward revision
to the previous month's data.
Don't forget
that there are two sides to a trade in the foreign exchange market.
So, while you might have a great handle on the complete package
of economic indicators published in the
United States
or Europe, most other countries also publish
similar economic data. The important thing to remember here is that
not all countries are as efficient as the G7 in releasing this information.
Once again, if you are going to trade the currency of a particular country,
you need to find out the particulars about their economic indicators.
As mentioned above, not all of these indicators carry the same weight
in the markets and not all of them are as accurate as others. Do your
homework and you won't be caught off guard.
General information
regarding major economic indicators
When focusing exclusively on the impact that economic indicators
have on price action in a particular market, the foreign exchange markets
are the most challenging, and therefore, have greatest potential for
profits of any market. Obviously, factors other than economic indicators
move prices and as such make other markets more or less potentially
profitable. But since a currency is a proxy for the country it represents,
the economic health of that country is priced into the currency. One
very important way to measure the health of an economy is through economic
indicators. The challenge comes in diligently keeping track of the nuts
and bolts of each country's particular economic information package.
Here are a few general comments about economic indicators and some of
the more closely watched data.
Most economic indicators can be divided
into leading and lagging indicators.
-
Leading indicators are economic factors
that change before the economy starts to follow a particular pattern
or trend. Leading indicators are used to predict changes in the
economy.
- Lagging Indicators
are economic factors that change after the economy has already begun
to follow a particular pattern or trend.
Major Indicators
The Gross
Domestic Product (GDP) - The sum of all goods
and services produced either by domestic or foreign companies. GDP indicates
the pace at which a country's economy is growing (or shrinking) and
is considered the broadest indicator of economic output and growth.
Industrial
Production - It is a chain-weighted measure
of the change in the production of the nation's factories, mines and
utilities as well as a measure of their industrial capacity and of how
many available resources among factories, utilities and mines are being
used (commonly known as capacity utilization). The manufacturing sector
accounts for one-quarter of the economy. The capacity utilization rate
provides an estimate of how much factory capacity is in use.
Purchasing
Managers Index (PMI) - The National Association
of Purchasing Managers (NAPM), now called the Institute for Supply Management,
releases a monthly composite index of national manufacturing conditions,
constructed from data on new orders, production, supplier delivery times,
backlogs, inventories, prices, employment, export orders, and import
orders. It is divided into manufacturing and non-manufacturing sub-indices.
Producer Price
Index (PPI) - The Producer Price Index (PPI)
is a measure of price changes in the manufacturing sector. It measures
average changes in selling prices received by domestic producers in
the manufacturing, mining, agriculture, and electric utility industries
for their output. The PPIs most often used for economic analysis are
those for finished goods, intermediate goods, and crude goods.
Consumer Price
Index (CPI) - The Consumer Price Index (CPI)
is a measure of the average price level paid by urban consumers (80%
of population) for a fixed basket of goods and services. It reports
price changes in over 200 categories. The CPI also includes various
user fees and taxes directly associated with the prices of specific
goods and services.
Durable Goods
- Durable Goods Orders measures new orders placed with domestic
manufacturers for immediate and future delivery of factory hard goods.
A durable good is defined as a good that lasts an extended period of
time (over three years) during which its services are extended.
Employment
Cost Index (ECI) - Payroll employment is a measure
of the number of jobs in more than 500 industries in all states and
255 metropolitan areas. The employment estimates are based on a survey
of larger businesses and counts the number of paid employees working
part-time or full-time in the nation's business and government establishments.
Retail Sales
- The retail sales report is a measure of the total receipts of
retail stores from samples representing all sizes and kinds of business
in retail trade throughout the nation. It is the timeliest indicator
of broad consumer spending patterns and is adjusted for normal seasonal
variation, holidays, and trading-day differences. Retail sales include
durable and nondurable merchandise sold, and services and excise taxes
incidental to the sale of merchandise. Excluded are sales taxes collected
directly from the customer.
Housing Starts
- The Housing Starts report measures the number of residential units
on which construction is begun each month. A start in construction is
defined as the beginning of excavation of the foundation for the building
and is comprised primarily of residential housing. Housing is very interest
rate sensitive and is one of the first sectors to react to changes in
interest rates. Significant reaction of start/permits to changing interest
rates signals interest rates are nearing trough or peak. To analyze,
focus on the percentage change in levels from the previous month. Report
is released around the middle of the following month.
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