Understand Econimic indicator _ undertand currency

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Gross Domestic Product

 

The gross domestic product (GDP) is the godfather of the indicator world. As an aggregate measure of total economic production for a country, GDP represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (exports are added, imports are subtracted).

Presented only quarterly, GDP is most often presented on an annualized percent basis. Most of the individual data sets will also be given in real terms, meaning that the data is adjusted for price changes, and is therefore net of inflation.

The GDP is an extremely comprehensive and detailed report. In fact, reading the GDP report brings us back to many of the indicators covered in earlier tutorial topics, as GDP incorporates many of them: retail sales, personal consumption and wholesale inventories are all used to help calculate the gross domestic product. Various chain-weighted indexes discussed in earlier topics are used to create Real GDP Quantity Indexes with a current base year of 2000

 

 

Real GDP is the one indicator that says the most about the health of the economy and the advance release will almost always move markets. It is by far the most followed, discussed and digested indicator out there - useful for economists, analysts, investors and policy makers. The general consensus is that 2.5-3.5% per year growth in real GDP is the range of best overall benefit; enough to provide for corporate profit and jobs growth yet moderate enough to not incite undue inflationary concerns. If the economy is just coming out of recession, it is OK for the GDP figure to jump into the 6-8% range briefly, but investors will look for the long-term rate to stay near the 3% level. The general definition of an economic recession is two consecutive quarters of negative GDP growth.

While the value of both exports and imports are included in the GDP report, imports are subtracted from total GDP, meaning that all consumer purchases of imported items are not counted as contributions toward GDP. Because the U.S. runs a current account deficit, importing far more than is exported, reported GDP figures have a slight drag on them. A related measure provided in the report, gross national product (GNP), goes one step further by only counting the value of goods and services produced by labor and property within the United States. (To learn more, read Current Account Deficits.)

The "corporate profits" and "inventory" data in the GDP report are a great resource for equity investors, as both categories show total growth during the period; corporate profits data also displays pre-tax profits, operating cash flows and breakdowns for all major sectors of the economy.

The biggest downside of this data is its lack of timeliness; investors only get one update per quarter and revisions can be large enough to significantly change the percentage change in GDP.

 

The Bureau of Economic Analysis (BEA) even supplies its own analysis of the quarterly data, presenting several useful documents that condense the massive release down to a manageable and readable size. They also provide an annual analysis of data that segments results down to the industry level - a very useful tool for both equity and fixed-income investors who are interested in particular industries related to their holdings.

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Consumer Price Index

 

 

The Consumer Price Index (CPI) is the benchmark inflation guide for the U.S. economy. It uses a "basket of goods" approach that aims to compare a consistent base of products from year to year, focusing on products that are bought and used by consumers on a daily basis. The price of your milk, eggs, toothpaste and hair cut are all captured in the CPI.

There are two presented CPI figures, the CPI for Urban Wage Earners and Clerical Workers (CPI-W), and the CPI for all Urban Consumers (CPI-U). The most watched metric, Core CPI (with food and energy prices removed) is the CPI-U, which will usually be presented with a seasonal adjustment, as consumer patterns vary widely depending on the time of year. The current base year for the CPI is 1982, so changes will typically be provided on a percentage basis to reflect only changes to prior index levels. Numbers will also be shown as an annual run rate of growth, to give investors a sense of the near-term inflationary outlook.

The Chain-Weighted CPI is also released along with the Core CPI, and is gaining momentum as a metric worth following, as Chain-Weighted CPI captures the effects of consumer choice. Chain-weighted CPI numbers are considered by many to be more reflective of actual consumer patterns than fixed CPI figures, as the chain-weighted index accounts for the substitution and new product bias that exists in the fixed CPI. If a consumer buys one product over another because of a price hike in the first product, chain-weighted figures will capture this buying shift, while Core CPI will not. Core CPI will continue measuring the price of the good as it rises, regardless of whether fewer people are purchasing the product.

The CPI is an extremely detailed release, with breakouts for most major consumer groups (such as food and beverage, apparel, recreation, etc.) and geographical regions, which are supplied by the "CPI U.S. City Averages"

 

The CPI is probably the single most important economic indicator available, if for no other reason than because it's very final. Many other indicators derive most of their value from the predictive ability of the CPI, so when this release arrives, many questions will be answered in the markets. This report will often move both equity and fixed-income markets, both the day of the release and on an ongoing basis. It may even set a new course in the markets for upcoming months. Analysts will be more sure of their convictions about what the Fed will do at the next Federal Open Market Committee meeting after digesting the Consumer Price Index.

 

The CPI is used to make adjustments to many cash flow mechanisms (pensions, Medicare, cost of living adjustments to insurance policies, etc.). As a result, most investors will find that the CPI affects them personally in some way. Fixed-income investors should always be aware of the rate of inflation against which they judge their investments; it is imperative to keep current yields ahead of inflation, or real wealth will fall.

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Existing Home Sales Report

 

The Existing Home Sales Report is a monthly release covering the number of existing homes that were closed during the survey month along with average sales prices by geographic region. The "closed" distinction is important because most closing periods are anywhere from six to eight weeks, so values listed are likely to relate to sales made about two months prior. The data is collected and released by the National Association of Realtors.

There are three important metrics in this report; in addition to the aggregate number of existing homes sold and median selling prices, inventory levels are provided through the "months supply" figure, a number that represents the length of time in months required to burn through all of the existing inventory measured during the period.

Data is provided raw and with seasonal adjustments. This is because weather is a big factor in determining month-to-month demand. As with the Housing Starts Report, the data is also broken down by geographic region (Northeast, Midwest, South and West). Price data will show percentage changes from the year-over-year period and the prior month.

Whereas the Housing Starts release deals with construction levels and is therefore a supply-oriented housing indicator, existing sales are much more about aggregate demand among consumers. While not included in the Conference Board's U.S. Leading Index, existing home sales are considered a leading indicator as well because higher levels are typically reached when the economy is coming out of a recession. The inventory metric also points to how much slack exists in the housing market, as a high reading in the month supply figure means that prices could fall as inventory is worked down to more normalized levels.

Besides business cycle considerations, prevailing mortgage rates are the biggest factors to consider when evaluating the sales levels. All else being equal, as rates rise, sales will fall as consumers wait for a more opportune time to purchase a home. If home sales are strong, other consumer industries may see an uptick in sales, such as home improvement retailers and retail mortgage lenders.

Because of the lag between when a sale is made and when closing occurs, the report is not as timely as the Housing Starts Report, but the sample size is larger and less likely to have large revisions. Also, condominium sales are included in this report, but not in the starts report.

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Purchasing Managers Index

 

The Institute for Supply Management (ISM) is responsible for maintaining the Purchasing Managers Index (PMI), which is the headline indicator in the monthly ISM Report on Business.The ISM is a non-profit group boasting more than 40,000 members engaged in the supply management and purchasing professions.

The PMI is a composite index of five "sub-indicators", which are extracted through surveys to more than 400 purchasing managers from around the country, chosen for their geographic and industry diversification benefits. The five sub-indexes are given a weighting, as follows:

Production level (.25)

New orders (from customers) (.30)

Supplier deliveries - (are they coming faster or slower?) (.15)

Inventories (.10)

Employment level (.20)

A diffusion process is done to the survey answers, which come in only three options; managers can either respond with "better", "same", or "worse" to the questions about the industry as they see it. The resulting PMI figure (which can be from 0 to 100) is calculated by taking the percentage of respondents that reported better conditions than the previous month and adding to that total half of the percentage of respondents that reported no change in conditions. For example, a PMI reading of 50 would indicate an equal number of respondents reporting "better conditions" and "worse conditions".

 

PMI is a very important sentiment reading, not only for manufacturing, but also the economy as a whole. Although U.S. manufacturing is not the huge component of total gross domestic product (GDP) that it once was, this industry is still where recessions tend to begin and end. For this reason, the PMI is very closely watched, setting the tone for the upcoming month and other indicator releases.

The magic number for the PMI is 50. A reading of 50 or higher generally indicates that the industry is expanding. If manufacturing is expanding, the general economy should be doing likewise. As such, it is considered a good indicator of future GDP levels. Many economists will adjust their GDP estimates after reading the PMI report. Another useful figure to remember is 42. An index level higher than 42%, over time, is considered the benchmark for economic (GDP) expansion. The different levels between 42 and 50 speak to the strength of that expansion. If the number falls below 42%, recession could be just around the corner.

 

As with many other indicators, the rate of change from month to month is vital. A reading of 51 (expanding manufacturing industry) coming after a month with a reading of 56 would not be seen favorably by the markets, especially if the economy had been showing solid growth previously.

The PMI can be considered a hybrid indicator in that is has actual data elements but also a confidence element, like the Consumer Confidence Index. Answers are subjective, and may not always relate to events as much as perceptions. Both can have value to investors looking to get a sense of actual experiences as well as see the PMI index level itself.

Bond markets may look more intently at the growth in supplier deliveries and prices paid areas of the report, as these have been historical pivot points for inflationary concerns. Bond markets will usually move in advance of an anticipated interest rate move, sending yields lower if rate cuts are expected and vice versa

 

PMI is considered a leading indicator in the eyes of the Fed, as evidenced by its mention in the FOMC minutes that are publicly released after its closed-door meetings. The supplier deliveries component itself is an official variable in calculating the Conference Board's U.S. Leading Index.

There are regional purchasing manager reports, some of which come out earlier than the PMI for a given month, but the PMI is the only national indicator.

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Producer Price Index

 

he Producer Price Index (PPI) is a weighted index of prices measured at the wholesale, or producer level. A monthly release from the Bureau of Labor Statistics (BLS), the PPI shows trends within the wholesale markets (the PPI was once called the Wholesale Price Index), manufacturing industries and commodities markets. All of the physical goods-producing industries that make up the U.S. economy are included, but imports are not.

The PPI release has three headline index figures, one each for crude, intermediate and finished goods on the national level:

 

PPI Commodity Index (crude): This shows the average price change from the previous month for commodities such as energy, coal, crude oil and the steel scrap.

 

PPI Stage of Processing (SOP) Index (intermediate): Goods here have been manufactured at some level but will be sold to further manufacturers to create the finished good. Some examples of SOP products are lumber, steel, cotton and diesel fuel.

 

PPI Industry Index (finished): Final stage manufacturing, and the source of the core PPI.

 

The core PPI figure is the main attraction, which is the finished goods index minus the food and energy components, which are removed because of their volatility. The PPI percentage change from the prior period and annual projected rate will be the most printed figure of the release.

The PPI looks to capture only the prices that are being paid during the survey month itself. Many companies that do regular business with large customers have long-term contract rates, which may be known now but not paid until a future date. The PPI excludes future values or contract rates.

The PPI does not represent prices at the consumer level - this is left to the Consumer Price Index (CPI), which is released a few trading days after the PPI. Like the CPI, the PPI uses a benchmark year in which a basket of goods was measured, and every year after is compared to the base year, which has a value of 100. For the PPI, that year is 1982.

Changes in the PPI should always be presented on a percentage basis, because the nominal changes can be misleading as the base number is no longer an even 100.

The biggest attribute of the PPI in the eyes of investors is its ability to predict the CPI. The theory is that most cost increases that are experienced by retailers will be passed on to customers, which the CPI could later validate. Because the CPI is the inflation indicator out there, investors will look to get a sneak preview by looking at the PPI figures. The Fed also knows this, so it studies the report intently to get clarity on future policy moves that might have to be made to fight inflation

 

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Retail Sales

 

Retail Sales is very closely watched by both economists and investors. This indicator tracks the dollar value of merchandise sold within the retail trade by taking a sampling of companies engaged in the business of selling end products to consumers. Both fixed point-of-sale businesses and non-store retailers (such as mail catalogs and vending machines) are used in the data sample. Companies of all sizes are used in the survey, from Wal-Mart to independent, small-town businesses.

 

The data released will cover the prior month's sales, making it a timely indicator of not only the performance of this important industry (consumer expenditures generally make up about two-thirds of total gross domestic product), but of price level activity as a whole. Retail Sales is considered a coincident indicator, in that activity reflects the current state of the economy. It is also considered a vital pre-inflationary indicator, which creates the biggest interest from Wall Street watchers and the Conference Review Board,which tracks data for the Federal Reserve Board's directors.

The release will contain two components: a total sales figure (and related % change from the previous month), and one "ex-autos", as the large ticket price and historical seasonality of auto sales can throw off the total figure disproportionately.

 

The release of the Retail Sales Report can cause above-average volatility in the stock market. Its clarity as a predictor of inflationary pressure can cause investors to rethink the likelihood of Fed rate cuts or hikes, depending on the direction of the underlying trend. For example, a sharp rise in retail sales in the middle of the business cycle may be followed by a short-term hike in interest rates by the Fed in the hope of curbing possible inflation. This would cause investors to sell bonds (causing yields to rise), and could pose problems for stocks as well, as inflation causes decreased future cash flows for companies.

If retail sales growth is stalled or slowing, this means consumers are not spending at previous levels, and could signal a recession due to the significant role personal consumption plays in the health of the economy.

One of the most important factors investors should note when viewing the indicator is how far off the reported figure is from the so-called consensus number, or "street number". In general, the stock market does not like surprises, so a figure that is higher than expected, even when the economy is humming along well, could trigger selling of stocks and bonds, as inflationary fears would be deemed higher than expected.

Retail companies themselves can be especially volatile with the release of this widely read industry report. The release data will show the sales performance of all the component sectors within retail (such as electronics retailers and restaurants), allowing investors to peek in on relative "pockets of strength" within the overall figures. An investor holding stocks in retail can see how his or her holdings are performing relative to the sector as a whole - a valuable analysis regardless of overall market conditions.

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Trade Balance Report

 

Investors and policymakers are increasingly using trade balances and information as a way to determine the health of the U.S. economy and its relationship with the rest of the world. The indicator within the Trade Balance Report that is most well known is the nominal trade deficit, which represents the current dollar value of U.S. exports minus the current dollar value of U.S. imports. The report also covers trade balances for services, such as financial and informational management, of which the U.S. is currently a large exporter, creating a surplus in this category. In the physical goods category, the largest components of the monthly nominal value are for consumer goods and energy (petroleum).

There are several different aggregate measures of trade balance that are recorded and presented in the media, but the one that is most cited will be the current account,a measure of the net of physical goods trade, services trade, investment income and unilateral transfers. A more detailed breakdown of the financial receipts between the U.S. and abroad is available quarterly, summarizing the monthly data and reporting adjustments as needed; it is also released by the Bureau of Economic Analysis (BEA)

 

he U.S. has been running a trade deficit for more than 20 years (and a current account deficit for some time as well), set against the backdrop of a long-term U.S. economic expansion. As a nation, the U.S. imports more than it exports, which, in itself, is not a bad thing. Because the U.S. economy has been expanding for so long, most other nations have not been able to keep up, meaning that U.S. demand for things as a nation is higher than other nations' demand for U.S. goods. What causes worry among some is the long-term trend of more money flowing out than coming back in.

 

The consensus is that the trade deficit must be balanced out by an equal dollar amount of foreign investment in U.S. assets. For example, if the U.S. spends $1 billion dollars to purchase computers from Japan, by definition, Japan is holding $1 billion U.S. dollars or other dollar-denominated assets. In practice, most of the balance in trade is made up by foreign countries holding U.S. Treasury securities. But when interest rates are low, our debt is not as attractive on a risk-adjusted basis, creating concern that our investments will no longer attract foreign ownership, causing the value of the dollar to drop and leading to decreased world purchasing power.

 

The current account as a percentage of total gross domestic product (GDP) is an important metric because it shows how large the current account number is in relation to overall output in the economy.

 

The Trade Balances Report can move the markets upon release if the data shows a marked change from the prior period. Compared to other indicators, this report is relatively hard to estimate outside of petroleum, so some surprise factors can occur from time to time. Most investors want to see the trade balance maintain current levels or fall, as it is a sign that exports are rising, and the companies who export are increasing sales in those areas of the world.

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Jobless Claims Report

 

The Jobless Claims Report is a weekly release that shows the number of first-time (initial) filings for state jobless claims nationwide. The data is seasonally adjusted, as certain times of the year are known for above-average hiring for temporary work (harvesting, holidays).

Due to the short sample period, week-to-week results can be volatile, so reported results are most often headlined as a four-week moving average, so that each week's release is the average of the four prior jobless claims reports. The release will show which states have had the biggest changes in claims from the previous week; the revised edition shows up about a week later, at which time a full breakdown by state and U.S. territory is available.

Also released with this report are the relatively minor data points of the insured unemployment rate and the total unemployed persons. These are not seen as valuable indicators because the total unemployed figure tends to stay relatively constant week to week.

 

New jobless claims for the week reflect an up-to-the-minute account of who is leaving work unexpectedly, reflecting the "run rate" of the economy's health with little lag time. The Jobless Claims Report gets a lot of press due to its simplicity and the theory that the healthier the job market, the healthier the economy: more people working means more disposable income, which leads to higher personal consumption and gross domestic product (GDP).

The fact that jobless claims are released weekly is both a blessing and a curse for investors; sometimes the markets will take a mid-month jobless claims report and react strongly to it, particularly if it shows a difference from the cumulative evidence of other recent indicators. For instance, if other indicators are showing a weakening economy, a surprise drop in jobless claims could slow down equity sellers and could actually lift stocks, even if only because there isn't any other more recent data to chew on.

A favorable Jobless Claims Report can also get lost in the shuffle of a busy news day, and hardly be noticed by Wall Street at all. The biggest factor week to week is how unsure investors are about the future direction of the economy.

Most economists agree that a sustained change f 30,000 claims or more is the benchmark for real job growth or job loss in the economy. Anything less is deemed statistically insignificant by most market analysts.

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ISM Non-Manufacturing Report

 

The Institute for Supply Management (ISM) releases the ISM Non-Manufacturing Report on Business, also known as the Service Report, each month.The ISM, a non-profit group with more than 40,000 members engaged in the supply management and purchasing professions, saw the need to represent more than just the manufacturing industry, and especially to give attention to the notoriously absent service sector, which reflects the majority of real gross domestic product (GDP).

While the previously-released ISM Manufacturing ROB and its well-known Purchasing Managers Index (PMI) receives the most Wall Street attention, the Non-Manufacturing Report is quickly becoming a well-read and analyzed indicator since it was first released in 1998.

Currently, the report does not have a composite index - the Business Activity Index is the most summary-oriented piece of the report, as it measures respondents' views on the overall level of business activity; the Business Activity Index will usually be the headline figure presented in publications and the media.

The entire report relates to investors because it represents a much larger share of the economy and, most importantly, it covers the hard-to-measure services industries, the fastest-growing part of the U.S. economy. The survey covers many of the same categories that are found in the PMI, including employment, supplier deliveries, inventory levels, production levels and prices.

 

Because it is a relatively new indicator, the Service Report has yet to gain the same attention of the PMI, but it is quickly appearing on many top analysts' radars because of its breadth of coverage and original survey format. The Service Report is also a timely indicator, coming out just days after the survey month.

For investors, the Service Report may be more useful than the PMI for examining the status of the industries in which they hold investments, and examining the trends taking place in that corner of the market. Each index (there are 10 in total) can be looked at individually, but the Business Activity Index is the most comprehensive; it asks whether the overall business conditions will be better, the same, or worse in the upcoming month.

 

The magic number for expansion within the Business Activity Index is 50; levels above 50 indicate that the service-related areas of the economy are generally expanding. Rates of change are important as well as where the economy sits within the current business cycle.

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Housing Starts

 

The New Residential Construction Report, known as "housing starts" on Wall Street, is a monthly report issued by the U.S. Census Bureau jointly with the U.S. Department of Housing and Urban Development (HUD). The data is derived from surveys of homebuilders nationwide, and three metrics are provided: housing starts, building permits and housing completions. A housing start is defined as beginning the foundation of the home itself. Building permits are counted as of when they are granted.

Both building permits and housing starts will be shown as a percentage change from the prior month and year-over-year period. In addition, both data sets are divided geographically into four regions: Northeast, Midwest, South and West. This helps to reflect the vast differences in real estate markets in different areas of the country. On the national aggregates, the data will be segmented between single-family and multiple-unit housing, and all information is presented with and without seasonal adjustment.

Housing starts and building permits are both considered leading indicators, and building permit figures are used to compute the Conference Board's U.S. Leading Index. Construction growth usually picks up at the beginning of the business cycle (the Leading Indicator Index is used to identify business cycle patterns in the economy, and is used by the Federal Open Market Committee (FOMC) during policy meetings).

 

This is not typically a report that shocks the markets, but some analysts will use the housing starts report to help create estimates for other consumer-based indicators; people buying new homes tend to spend money on other consumer goods such as furniture, lawn and garden supplies, and home appliances.

 

The housing market may show the first signs of stalling after a recent rate hike by the Federal Reserve. This is because rising mortgage rates may be enough to convince homebuilders to slow down on new home starts. For investors looking to evaluate the real estate market, housing starts should be looked at in conjunction with existing home sales, the rental component of the Consumer Price Index and the Housing Price Index

 

According to the Census Bureau, "it may take four months to establish an underlying trend for building permit authorizations, five months for total starts and six months for total completions", so investors should look more closely at the forming patterns to see through often-volatile month to month results.

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Non-Farm Payroll

 

The non-farm payroll (NFP) report is a key economic indicator for the United States. It is intended to represent the total number of paid workers in the U.S. minus farm employees, government employees, private household employees and employees of nonprofit organizations.

 

Non-farm increase =>> USD increase

Non-farm decrease=>> USD decrease

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Business Outlook Survey

 

The Philadelphia Federal Reserve's Business Outlook Survey (also known as the Philadelphia Fed Report) is a monthly survey of manufacturing purchasing managers conducting business around the tri-state area of Pennsylvania, New Jersey and Delaware. The survey is conducted in the vein of the Purchasing Managers Index (PMI) report; it questions voluntary participants about their outlook on things such as employment, new orders, shipments, inventories and prices paid. Answers are given in the form of "better", "worse" or "same" as the previous month, and, as with the PMI, results are diffused into an index, only this index uses a median value for expansion of 0, rather than 50. The Philly Fed Report signals expansion when it is above zero and contraction when below. As a result, values can be negative month to month.

The survey has been conducted each month since May 1968, and is considered one of the most valuable regional purchasing manager indexes (There are currently almost 15 such regional reports, covering much of the U.S., albeit in piecemeal fashion).

 

As far as regional manufacturing reports go, the Philly Fed Report is one of the most watched, both for its early delivery to investors (released before the month is even over), and its blend of manufacturing sectors and businesses. The Philly Fed Report, along with the Chicago NAPM Index, have shown high correlations to the upcoming and hugely followed PMI report.

 

 

This index isn't typically a big market mover (due to its small sample size and limited geographic range), but if a big surprise in terms of percentage change appears in the report, quick-thinking investors may anticipate similar changes to the PMI and make market moves accordingly.

The report is presented with solid commentary from the Reserve Bank itself, and often includes special survey questions that may be extremely timely if the economy is unsure of future growth possibilities.

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Money supply

 

The money supply is just that: the amount of money floating around the economy and available for spending. Different numerical aggregates show different subsets of money based on their liquidity, starting with M0 (the most liquid), which is just the dollar value of physical cash and coin, and M1, which includes all of M0 as well as checking accounts, traveler's checks and demand deposits. The M2 aggregate includes the dollar value of all of M1 in addition to savings accounts, time deposits of less than $100,000 (such as certificates of deposit), and money market funds held by investors. (For related reading, see What Is Money?)

The Federal Reserve publishes data on the levels of M1 and M2 weekly, and has been collecting data on the money supply since the 1950s. In the less financially complicated world that existed then, the supply of money showed a very strong correlation to how much money was spent, and it was therefore studied fervently by economists for clues to economic growth.

Legislation passed in 1978 mandated the Federal Reserve to set annual targets for money supply growth. At the time, there was a still a high correlation between money supply growth and overall economic growth, as measured by gross domestic product (GDP). Over time, that close relationship started to break down due to changes in banking accounts, the proliferation of financing companies, and more widespread investment among consumers (stock and bond investments are not captured in M1 and M2 aggregates). When the legislation expired in 2000, the Fed announced that it would no longer set targets for growth of the money supply as a matter of policy, although it remains an important indicator for predicting inflation and spending patterns among consumers. In the words of the Fed, "…the FOMC [Federal Open Market Committee] believes that the behavior of money and credit will continue to have value for gauging economic and financial conditions."

The M2 aggregate is a large component of the Conference Board's U.S. Leading Index (which contains 10 indicators), making up more than 30% of the index.

 

The Federal Reserve has a measure of control over the money supply aggregates, which differentiates this indicator from most others. Through open market operations such as buying and selling Treasuries and setting the reserve requirements, the Fed does things to alter the money supply through its daily course of business. Setting short-term interest rates to guide the economy remains the core policy directive of the FOMC, but changes to rates such as the fed funds rate do eventually manifest themselves in the money supply, albeit with a time lag

 

No single release from the Fed regarding the money supply is going to shock the market; the weekly release schedule alone takes a lot of the surprise factor out mix, so this report will rarely move the markets in the short term. History has shown that the money supply tends to rise faster (accelerate faster) during periods of economic expansion that during contraction periods.

If there is one measure that is looked at more than the rest, it's the M2 figure - cash equivalents in this designation are deemed to be collectively liquid enough to be spent without any real delays or penalty costs. While growth in the money supply does not directly indicate future spending growth as it once did, it does indicate that inflation could be around the corner. This is where knowing both money supply growth and GDP growth becomes very handy - if money supply growth is rapidly outpacing economic growth, there will soon be more money chasing after the same amount of goods. This echoes the dryly famous quote: "Inflation is always and everywhere a monetary phenomenon."

 

Changes in the money supply are usually quoted in the media on an annualized percentage basis, which helps to smooth out short-term statistical "blips" that can occur week to week.

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Building Permits

 

A type of authorization that must be granted by a government or other regulatory body before the construction of a new or existing building can legally occur. The U.S. census bureau reports the finalized number of the total monthly building permits on the 18th work day of every month.

 

The monthly building permit report is closely watched by economists and investors alike. Since all related factors associated with the construction of a building are important economic activities (for example, financing and employment), the building permit report can give a major hint as to the state of the economy in the near future.

 

UP =>> DOLLAR UP

DOWN =>> DOLLAR DOWN

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Consumer Confidence Index

 

The Consumer Confidence Index (CCI) is a monthly release from the Conference Board, a non-profit business group that is highly regarded by investors and the Federal Reserve. CCI is a unique indicator, formed from survey results of more than 5,000 households and designed to gauge the relative financial health, spending power and confidence of the average consumer.

There are three separate headline figures: one for how people feel currently (Index of Consumer Sentiment), one for how they feel the general economy is going (Current Economic Conditions), and the third for how they see things in six months' time (Index of Consumer Expectations).

The Consumer Sentiment Index is a component of the Conference Board's template of economic indicators. Historically, changes in this index (of the three released) has tracked the leading edge of the business cycle well.

There are other sentiment indicators that can sometimes be confused with the Consumer Sentiment report or used in conjunction with it, such as the University of Michigan Sentiment Report, and some investors will try to average the two reports to get their own sense of consumer sentiment.

 

A strong consumer confidence report, especially at a time when the economy is lagging behind estimates, can move the market by making investors more willing to purchase equities. The idea behind consumer confidence is that a happy consumer - one who feels that his or her standard of living is increasing - is more likely to spend more and make bigger purchases, like a new car or home.

It is a highly subjective survey, and the results should be interpreted as such. People can grab onto a small situation that garners a lot of mainstream press, such as gas prices, and use that as their basis for overall economic conditions, fair or not. There are no real data sets here, and people are not economists, so they cannot be counted on to realize that, for example, because gas prices may only represent 5% of their expenses, they should not sour their entire economic outlook.

 

Because of its subjective nature and relatively small sample size, most economists will look at moving averages of between three and six months for consumer confidence figures before predicting a major shift in sentiment; some also feel that index level changes of at least five points are necessary before calling for the reversal of an existing trend. In general, however, rising consumer confidence will trend in line with rising retail sales and, personal consumption and expenditures, consumer-driven indicators that relate to spending patterns.

Regional breakdowns of the data are valuable for seeing the breadth of sentiment across the country, which can be a useful factor in the real estate market, along with indicators such as housing starts and existing home sales.

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Factory Orders Report

 

The Manufacturers' Shipments, Inventories and Orders Report, often referred to as the Factory Orders Report, contains partly new and partly old information, although the old information is broken down more thoroughly in this release. The report contains the Durable Goods Report information, which is released about one week prior (but with revisions), and introduces non-durable items into the mix, representing industries such as apparel and food products. The Factory Orders Report is meant to capture the overall health of the entire manufacturing sector, measuring new orders, inventories, total shipments and unfilled orders for the month surveyed.

Statistics are displayed in current dollars and as percent changes from prior month and prior year. As with the Durable Goods Report, the indicator derives most of its value as a supply/demand indicator; inventory levels can be compared to shipments, new orders and other indicators of consumer demand such as retail sales and gross domestic product (GDP).

The Factory Orders Report is more useful than the Durable Goods Report for examining trends within industries. While only "computer equipment" may be counted in the Durable Goods Report, the Factory Orders Report will show separate figures for computer hardware, semiconductors, monitors, etc. This is mainly due to the speed at which the (advance) Durable Goods Report is released, which makes it more timely but also more vague.

The report is not likely to move the broad markets, as about half of the data is already known - the ratio of durable to non-durable manufacturing (in dollars) is about 55/45. Factory Orders Report levels are, however, valuable for estimating future economic output levels, as estimates from the Factory Orders Report are used to calculate GDP itself. Non-durables manufacturing industries may move as a group upon the release, as investors in those stocks pour through the data looking for clues on upcoming earnings levels.

 

Because current dollars are used to calculate values, neither inflation nor price - changes that may affect how inventories are valued - is accounted for. For example, if the price of petroleum drops mid-month, a company holding the same inventory levels based on volume will show a drop in the value of its inventory in the Factory Orders Report.

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Beige Book

 

Made public in 1983, the Summary of Commentary on Current Economic Conditions by Federal Reserve District, or Beige Book, as it is known, has a different style and tone than many other indicators. Rather than being filled with raw data, the Beige Book takes a more conversational approach. The book has 13 sections in total; 12 regional reports from each of the member Fed district banks, preceded by one national summary drawn from the individual reports that follow it. This is the first chance investors have to see how the Fed draws logical and intuitive conclusions from the raw data presented in other indicator releases.

The Beige Book is published eight times per year, just before each of the Federal Open Market Committee (FOMC) meetings. While it is used by committee members during the meeting itself, it does not carry more clout than other data values and indicators. There is a lot of real-time data that the Fed has at its disposal and, unfortunately, notes from the FOMC meetings themselves are currently not public information.

The Beige Book aims to give to give a broad overview of the economy, bringing many variables and indicators into the mix. Discussion will be about things such as labor markets, wage and price pressures, retail and ecommerce activity and manufacturing output. Investors can see comments that are forward-looking; the Beige Book will contain comments that look to predict trends and anticipate changes over the next few months or quarters.

 

he Beige Book by itself is not likely to have a big effect on the markets in the short term, mainly because no new data series is presented here.

Investors and Fed watchers look to the Beige Book to gain insight into the next FOMC meeting. Is there language that shows fear about inflation? Do the reports suggest that the economy needs a financial boost to continue growing? This is the critical information that will be analyzed in the Beige Book.

To read the Beige Book effectively, one must become accustomed to "Fed speak", a special verbiage of measured remarks intentionally designed to say a little without ever saying a lot. The last thing the Fed wants to do with its words is corner itself into a pre-supposed policy decision prior to the next FOMC meeting. Investors won't ever see a definitive statement about the Fed going one way or the other with monetary policy, but there may be valuable clues in the Beige Book - at least for the trained eye

 

The Fed directors and their staffs will use their very long proverbial arms to obtain an economic pulse that can't be found in any other indicator's report. They will interview business leaders, bank presidents, members of other Fed boards and hundreds of other informal networks before writing the reports that will be compiled in the Beige Book.

Investors who hold investments that conduct business in specific regions of the country may find valuable information about how those areas are performing as a whole. For instance, a stockholder in a regional bank operating in the Southeastern U.S. would want to know what the Atlanta Fed Bank says about the health of that region.

Occasionally, the Beige Book will give evidence that may contradict what a previous indicator has presented; the Employment Report may suggest that there is slack in the labor market, while Beige Book reports may give anecdotal evidence that wage pressures are forming, or that certain specific labor markets are tight

 

On rare occasions, the Beige Book will be released at a time when information is badly needed in the markets; shock events like the September 11, 2001, terrorist attacks or a stock market crash can effectively wipe the data slate clean, and investors will count on the Fed to help describe the relative state of affairs during these tumultuous times.

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Durable Goods Report

 

The Advance Report on Durable Goods Manufacturer's Shipments, Inventories and Orders, or the Durable Goods Report, provides data on new orders received from more than 4,000 manufacturers of durable goods, which are generally defined as higher-priced capital goods orders with a useful life of three years or more, such as cars, semiconductor equipment and turbines.More than 85 industries are represented in the sample, which covers the entire United States.

Figures are provided in current dollars along with percentage change from prior month and prior year for new orders, total shipments, total unfilled orders (orders that have been booked but not filled as of month-end) and inventories. Revisions are also included for the prior three months if they materially affect prior-released results.

The data compiled for consumer durable goods is one of the 10 components of the Conference Board's U.S. Leading Index, as growth at this level has typically occurred in advance of general economic expansion.

 

The headline figure will often leave out transportation and defense orders, as they can show higher volatility than the rest of the areas. In these industries, the ticket prices are sufficiently high that the sample error alone could swing the presented figure significantly.

It is useful for investors not only in the nominal terms of order levels, but as a sign of business demand as a whole. Capital goods represent the higher-cost capital upgrades a company can make, and signals confidence in business conditions, which could lead to increased sales further up the supply chain and gains in hours worked and non-farm payrolls.

Investors can play with the numbers here and look at things such as the rates of growth of inventories versus shipments; changes in the inventory/shipments ratio over time can point to either demand (falling ratio) or supply (rising ratio) imbalances in the economy.

 

 

Because capital goods take longer on average to manufacture than cyclical goods, new orders are often used by investors to gauge the likelihood of sales and earnings increases by the companies who make them. For instance, a company like Boeing could make revenue adjustments on the upside based on strong new order growth, signs of which could be gleaned from the Durable Goods Report. In addition, when production and capacity at U.S. manufacturers is rising, it helps to combat inflationary pressure, as more goods will be produced for consumer purchase.

Investors should be cautious to see through the high levels of volatility found in areas of the Durable Goods Report. Month-to-month changes should be compared with year-over-year figures and year-to-date estimates, looking for the overall trends that tend to define the business cycle.