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Economic Indicators and Market Reaction

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Every week there are dozens of economic surveys and indicators released. In the past, experienced professionals and economists have had an advantage in receiving this data in a timely fashion. Fortunately, the emergence of the Internet has changed this situation by giving everyone access.

Economic indicators can have a huge impact on the market, knowing how to interpret and analyze them is important for all investors. Without further ado, here are 11 economic indicators we feel investors should understand.

 

• Being Book (http://www.federalreserve.gov/FOMC/BeigeBook) - This report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by district and sector.
• When Published: Released two Wednesdays before every FOMC meeting, 8 times per year
• Districts Tracked: First District - Boston, Second District - New York, Third District - Philadelphia, Fourth District - Cleveland, Fifth District - Richmond, Sixth District – Atlanta, Seventh District – Chicago, Eighth District - St. Louis, Ninth District – Minneapolis, Tenth District - Kansas City, Eleventh District - Dallas, Twelfth District - San Francisco.
• Contains:
• Consumer Spending and Tourism (Retail Sales, Auto Sales, Travel and Tourism)
• Services (trucking, information technology, corporate legal services and accounting, shipping .etc.)
• Manufacturing
• Real Estate (leasing) and Construction (residential and commercial)
• Banking and Finance (Loan Demand, commercial lending, construction lending, residential mortgage lending)
• Agriculture and Natural Resources (crop conditions, Exploration and development of oil and gas, Coal production)
• Labor Markets, Wages, and Prices (Staffing, energy prices, raw material prices, construction material prices
• Consumer Confidence Index (http://www.conference-board.org/economics/consumerConfidence.cfm) - The Consumer Confidence Survey is based on a sample of 5,000 U.S. Households and is considered one of the most accurate indicators of confidence. It even goes as far as calculating the number of "help wanted" ads in newspapers to detect how tight the job market is. The idea behind consumer confidence is that when the economy warrants more jobs, increased wages, and lower interest rates, it increases our confidence and spending power.

1. When Published: The Consumer Confidence Index (CCI) is put out by The Conference Board last Tuesday of every month. (There are others such as the Michigan Sentiment Index which is put out monthly by the University of Michigan).
2. What it means for Investors: Confidence is looked at closely by the Federal Reserve when determining interest rates, which affect stock prices. Lowering interest rates make it easier to borrow which ultimately supports consumer spending and higher confidence - something the stock markets love to hear. Keep in mind that lowering interest rates is not an instantaneous confidence booster, it can take 6-8 months for rate cuts to work their way into the economy. On the other hand, if confidence is rising rapidly it could trigger higher inflation.

• Consumer Price Index (ftp://146.142.4.23/pub/news.release/cpi.txt) - The CPI is a basket of consumer goods (and services) tracked from month to month (excluding taxes). These goods include everything from the price of diapers and milk to funeral expenses. CPI figures are collected in 87 areas throughout the U.S. from over 22,000 retail and service establishments. Rent paid by individuals is also collected from 50,000 landlords and tenants. The CPI index is available for two different population groups: one for "All Urban Consumers (CPI-U)", and the other for "Urban Wage Earners and Clerical Workers (CPI-W)". The bureau of labor has estimated that the CPI-U covers all expenditures made by wage earners and represents approximately 87% of the total U.S. population. The CPI-W only includes hourly wage earners and clerical workers, this covers approximately 32% of the population

1. When Published: The Consumer Price Index is put out by The Bureau of Labor Statistics around the 15th of each month. E.g. Consumer Price Index data for July are scheduled for release on  Wednesday, August 15, 2007, at 8:30 A.M. (EDT).
2. What it means for Investors - The CPI is one of the most followed economic indicators and considered to be a big market mover. A rising CPI indicates inflation, a large increase is something financial markets don't like to hear. Inflation is the rate at which the general price for goods and services is rising, and subsequently our purchasing power is falling. As inflation rises this means that every dollar you own will buy a less percentage of a good or service. The Federal Reserve typically battles rising inflation by increasing short term interest rates. Rising rates are frowned upon by corporations and investors because the cost of borrowing money increases.

• Employment Cost Index: (http://stats.bls.gov/news.release/eci.nr0.htm) – The Employment Cost Index is a quarterly survey of employer payrolls in the final month of the quarter. The ECI tracks movement in the cost of labor which includes wages, fringe benefits, and bonuses for employees at all levels of involvement in the companies. Wages and salaries make up approximately 75% of the indexes value. The one benefit not included in the ECI is employee stock options, which actually don't cost employers anything to issue. The Bureau of Labor surveys over 3,000 private sector firms and over 500 local governments, schools and other public sector organizations.
• When Published: Released the last Thursday of Apr, Jul, Nov and Jan
• Employment Situation (http://stats.bls.gov/news.release/empsit.nr0.htm) – The Employment Situation Report is a monthly indicator which contains two major parts. One part is the unemployment and new jobs created, the report tells the unemployment rate and the change in unemployment rate. The second part of the report indicates things like average weekly hours worked and average hourly earnings, this data is important for determining the tightness of the labor market, which is a major determinant of inflation. The Bureau of Labor surveys over 250 regions across the United States and covers almost every major industry from manufacturing to information technology.

1. When Published: Released the first Friday of the Month.

• Real Gross Domestic Product / Constant dollar GDP (http://www.bea.doc.gov/bea/dn1.htm) - GDP is put out by Bureau of Economic Analysis around last Day of the Quarter. GDP is a gross measure of market activity. It represents the monetary value of all the goods and services produced by an economy over a specified period. This includes consumption, government purchases, investments, and the trade balance (exports minus imports). The GDP is perhaps the greatest indicator of the economic health of a country.

1. When Published: Released last Day of the Quarter.
2. What it means for Investors: The most recent GDP figures have a relatively high importance to the markets. GDP indicates the pace at which a country's economy is growing (or shrinking). If GDP growth fails to meet or beat the market expectations stocks can temporarily pay the price.

• Housing Starts (http://www.census.gov/indicator/www/newresconst.pdf) - is put out by US Census Bureau around the middle of the following month. This economic indicator tracks how many new single-family homes or buildings were constructed throughout the month. For the survey each house and each single apartment are counted as one housing start, (a building with 200 apartments would be counted as 200 housing starts). The figures include all private and publicly owned units, with the only exception being mobile homes which are not counted.

1. When Published: Released around the middle of the following month.
2. What it means for Investors - Housing starts are considered to be a leading indicator, meaning it detects trends in the economy looking forward. Declining housing starts show a slowing economy, while increases in housing activity can pull an economy out of a downturn. Be careful though, a considerably stronger report is not good because it can be interpreted that growth is extremely strong and could lead to high inflation.

• Philadelphia Fed Index or Business Outlook Survey (http://www.phil.frb.org/econ/bos/bosschedule.html) – The Business Outlook Survey is a monthly survey of manufacturers located around the states of Pennsylvania, New Jersey and Delaware. Companies surveyed indicate the direction of change in their overall business activity and in the various measures of activity at their plants. They are asked questions regarding employment, working hours, new and unfilled orders, shipments inventories, delivery times, prices paid, and prices received. The survey has been conducted each month since May 1968. The index signals expansion when it is above zero and contraction when below.

1. When Published: Released around the 17th of the month.
2. What it means for Investors: The Philadelphia Fed Index is considered to be a good indicator of changes in everything from employment, general prices, and conditions within the manufacturing industry. Manufacturing is considered to be a precursor to future economic conditions and it lays the groundwork toward economic recovery. For example, in a poor economy if manufacturing starts to pick up there is an expectation that the economy will soon follow behind.
   
   This index isn't a big market mover, but the results found in the survey can indicate what to expect from the Purchasing Managers' Index (which comes out a few days later and covers the entire U.S.).

• Producer Price Index – PPI (ftp://146.142.4.23/pub/news.release/ppi.txt) – The Producer Price Index is not as widely used as the CPI, but it is still considered to be a good indicator of inflation. Formerly known as the "Wholesale Price Index", the PPI is a basket of various indexes covering a wide range of areas affecting domestic producers. The PPI includes industries such as goods manufacturing, fishing, agriculture, and other commodities. Each month approximately 100,000 prices are collected from 30,000 production and manufacturing firms.

1. When Published: Released the second full week of the month.
2. What it means for Investors: The PPI is another important indicator which investors pay close attention to. It is not as strong as the CPI in detecting inflation, but because it includes goods being produced it is often a forecast of future CPI releases. The PPI is also used extensively used by company officials for determining future supply or sales contracts. For example, a sudden rise in the PPI could mean that future sales contracts will also rise.

• Purchasing Managers Index (http://www.ism.ws/ISMReport/) - is put out by Institute for Supply Management first business day of the month. The PMI is a composite index that is based on five major indicators including: new orders, inventory levels, production, supplier deliveries, and the employment environment. Each indicator has a different weight and the data is adjusted for seasonal factors. The Association of Purchasing Managers surveys over 300 purchasing managers nationwide who represent 20 different industries. A PMI index over 50 indicates that manufacturing is expanding while anything below 50 means that the industry is contracting.

1. When Published: Released the first business day of the month.
2. What it means for Investors - The PMI report is an extremely important indicator for the financial markets as it is the best indicator of factory production. The index is popular for detecting inflationary pressure as well as manufacturing economic activity, both of which investors pay close attention to. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month it is very timely. Should the PMI report an unexpected change, it is usually followed by a quick reaction in stocks. One especially key area of the report is growth in new orders, which predicts manufacturing activity in future months.

• Advance Monthly Retail Sales (http://www.census.gov/svsd/www/advtable.html ) - Retail sales are a key driving force in our economy, this indicator tracks the merchandise sold by companies within the retail trade including everyone from Wal-mart down to the corner grocery store. The Census Bureau can't possibly get the sales data from every retailer, so instead it surveys hundreds of various sized firms and business offering some type of retail trade. Most of the companies surveyed are a random sample of retailers making federal insurance contributions. Every month the data is released showing the percent change from the previous month data. A negative number indicates that sales decreased from the previous months sales.

1. When Published: Released around the 12th of the month.

What it means for Investors: This indicator is a big market mover, especially for retail stocks. The data is very timely because retail sales data is released within 2 weeks of the previous month.

Cite this as:

YouSigma. (2008). "Economic Indicators and Market Reaction." From http://www.yousigma.com.

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