swings in currencies. I want you to have a good understanding of what they
mean so you can relate possible shocks to the markets when and if they are
dramatically changed from what is expected before the reports’ release.
• Employment Cost Index (ECI). This is a measure of total employee
compensation costs, including wages, salaries, and benefits. The ECI is
the broadest measure of labor costs. The employment cost index helps
analysts determine the trend of the direction of employers’ cost of having
employees. This can give economists a clue whether inflation is
perking up from a cost-of-doing-business standpoint. If a company
needs to pay more to hire qualified workers, then the cost of doing
business increases. This reduces profit margins. Companies usually
raise their prices to consumers if their costs increase, and that is where
the inflation theme plays out.
• Producer Price Index (PPI). This is a measure of the average prices
paid by producers for a fixed basket of capital and consumer goods.
The PPI measures price changes in the manufacturing sector. Inflation
is a general increase in the prices of goods and services.
• Consumer Price Index (CPI). This is a measure of the average price
level of goods and services purchased by consumers. Monthly changes
in the CPI represent the rate of inflation. The consumer price index is
the most widely followed indicator of inflation in the United States.
Just knowing what inflation is and how it influences the markets can
put an investor ahead of the game. Inflation is a general increase in the
price of goods and services. The relationship between inflation and interest
rates is the key to understanding how data like the CPI influence
the markets. Higher energy prices, manufacturing cost increases, med-
ical costs, and imbalances in global supply and demand of raw materials
and food products all weigh on this report. Take the price of gasoline
we pay at the pumps. If gas prices escalate to the point where it
costs $30 to fill up a car, or $60, or even $100, as was the case in 2006,
consumers will have less spending money for other items. Even
weather can be a factor on short-term changes on food. What would be
the cost of tomatoes at the grocery store after a damaging freeze in California
or in Georgia—$3 or $4 per pound? It has occurred. Think of the
restaurants that serve salads and lose revenue, let alone the farmer
whose crop is destroyed. This all plays a part in the CPI number. The
core rate is the inflation number that excludes the volatile food and energy
components.
• Gross Domestic Product (GDP). This is the broadest measure of aggregate
economic activity and accounts for almost every sector of the
economy. Analysts use this figure to track the economy’s performance
because it usually indicates how strong or how weak the economy is,
and that helps predict the potential profit margin for companies. It also
helps analysts gauge whether the economy is accelerating or slowing
down. The stock market likes to see healthy economic growth because
that translates to higher corporate profits.
• Industrial Production and Capacity Utilization Rate. This is a measure
of the physical output of the nation’s factories, mines, and utilities.
The capacity utilization rate reflects the usage of available resources
and provides an estimate of how much factory capacity is in use. If the
utilization rate gets too high (above 85 percent), it can lead to inflationary
pressures. Industrial production shows how much factories,
mines, and utilities are producing. Since the manufacturing sector is
estimated to account for one-quarter of the economy, this report
can sometimes have a big impact on the stock and financial markets’
movement.
• Index of Leading Indicators. This report is a composite index of 10
economic indicators that typically lead overall economic activity. The
Index of Leading Indicators helps to predict the health of the economy,
such as recessions and economic expansions.
• International Trade. This measures the difference between imports
and exports of both goods and services. Changes in the level of imports
and exports are an important tool that is used to gauge economic
trends both here and overseas. This report can have a profound effect
on the value of the dollar. That in turn can help or hurt multinational
corporations whose profits overseas can diminish when they convert
their funds back to the United States, especially if the U.S. dollar is
overvalued. Another valuable aspect of this report is that imports can
help indicate demand for foreign goods here in the United States and
exports may show the demand for U.S. goods in overseas countries.
• Institute of Supply Management (ISM) Index (formerly the National
Association of Purchasing Managers [NAPM] Survey). This survey is
a composite diffusion index of national manufacturing conditions.
Readings above 50 percent indicate an expanding factory sector. The
ISM Index helps economists and analysts get a detailed look at the
manufacturing sector of the economy. Since manufacturing is a major
source of strength for the economy and can reflect the nation’s employment
condition, this report is very important to watch.
• Factory Orders. This reports the dollar level of new orders for manufacturing
durable and nondurable goods. The data from this report
shows the potential that factories will be increasing or decreasing activity
based on the amount of orders they receive. This report provides
insight to the demand not only for hard goods, such as refrigerators and
cars, but also for nondurable items, such as cigarettes and apparel.
• Productivity and Costs. Productivity measures the growth of labor
efficiency in producing the economy’s goods and services. Unit labor
costs reflect the labor costs of producing each unit of output. Both are
followed as indicators of future inflationary trends. Productivity
growth is critical because it allows for higher wages and faster economic
growth without inflationary consequences.
• Consumer Confidence. This is a survey or a poll of consumers’ opinions
regarding both their present conditions and their expectations regarding
their economic conditions. Five thousand consumers across
the country are surveyed each month. The theory here is that the level
of consumer confidence is directly related to the strength of consumer
spending. Consumer spending accounts for two-thirds of the economy.
If consumers are confident that times are good, spending is likely to remain
stable or even to increase. If consumer confidence is weak, then
more times than not consumers save and do not spend money. This
shift in spending habits can help or hurt the developments in the economy
from durable goods sales to home or car purchases. If consumers
are not confident, then they are less likely to purchase those big-ticket
items.
• Personal Income and Spending. Personal income is the estimated
dollar amount of income received by Americans. Personal spending is
the estimated dollar amount that consumers use for purchases of
durable and nondurable goods and services. This economic number is
important because if consumers are spending more than they make,
eventually the spending will stop, thus causing a downturn in the economy.
Another aspect to consider is consumers who save, maybe in-
help indicate demand for foreign goods here in the United States and
exports may show the demand for U.S. goods in overseas countries.
• Institute of Supply Management (ISM) Index (formerly the National
Association of Purchasing Managers [NAPM] Survey). This survey is
a composite diffusion index of national manufacturing conditions.
Readings above 50 percent indicate an expanding factory sector. The
ISM Index helps economists and analysts get a detailed look at the
manufacturing sector of the economy. Since manufacturing is a major
source of strength for the economy and can reflect the nation’s employment
condition, this report is very important to watch.
• Factory Orders. This reports the dollar level of new orders for manufacturing
durable and nondurable goods. The data from this report
shows the potential that factories will be increasing or decreasing activity
based on the amount of orders they receive. This report provides
insight to the demand not only for hard goods, such as refrigerators and
cars, but also for nondurable items, such as cigarettes and apparel.
• Productivity and Costs. Productivity measures the growth of labor
efficiency in producing the economy’s goods and services. Unit labor
costs reflect the labor costs of producing each unit of output. Both are
followed as indicators of future inflationary trends. Productivity
growth is critical because it allows for higher wages and faster economic
growth without inflationary consequences.
• Consumer Confidence. This is a survey or a poll of consumers’ opinions
regarding both their present conditions and their expectations regarding
their economic conditions. Five thousand consumers across
the country are surveyed each month. The theory here is that the level
of consumer confidence is directly related to the strength of consumer
spending. Consumer spending accounts for two-thirds of the economy.
If consumers are confident that times are good, spending is likely to remain
stable or even to increase. If consumer confidence is weak, then
more times than not consumers save and do not spend money. This
shift in spending habits can help or hurt the developments in the economy
from durable goods sales to home or car purchases. If consumers
are not confident, then they are less likely to purchase those big-ticket
items.
• Personal Income and Spending. Personal income is the estimated
dollar amount of income received by Americans. Personal spending is
the estimated dollar amount that consumers use for purchases of
durable and nondurable goods and services. This economic number is
important because if consumers are spending more than they make,
eventually the spending will stop, thus causing a downturn in the economy.
Another aspect to consider is consumers who save, maybe in-
also economic momentum. Each time the construction of a new home
begins, it translates into more construction jobs and income, which
will be pumped back into the economy.
• New Home Sales. This is the number of newly constructed homes
with a committed sale during a month. The level of new home sales indicates
housing market trends. This provides a gauge of not only the
demand for housing but also economic momentum. People have to be
feeling pretty comfortable and confident in their financial position to
buy a house. Furthermore, this narrow piece of data has a powerful
multiplier effect throughout the economy and, therefore, across the
markets and your investments. By tracking economic data such as new
home sales, investors can gain specific investment ideas as well as
broad guidance for managing a portfolio. Each time the construction of
a new home begins, it translates to more construction jobs and income,
which will be pumped back into the economy. Once the home is sold,
it generates revenues for the home builder and the realtor. It brings a
myriad of consumption opportunities for the buyer. Furniture and large
and small appliances are just some of the items new home buyers
might purchase. The economic ripple effect can be substantial, especially
when a hundred thousand new households around the country
are doing this every month. Since the economic backdrop is the most
pervasive influence on financial markets, new home sales have a direct
bearing on stocks, bonds, interest rates, and the economy in general. In
a more specific sense, trends in the new home sales data carry valuable
clues for the stocks of home builders, mortgage lenders, and home furnishings
companies.
• Existing Home Sales. This is the number of previously constructed
homes with a closed sale during the month. Sales of existing homes
(also known as home resales) are a larger share of the market than new
homes and indicate housing market trends. This provides a gauge of
not only the demand for housing but also economic momentum. People
have to be feeling pretty comfortable and confident of their own financial
situation to buy a house. Analysts follow economic data such as
home resales because this generates a tremendous economic ripple effect.
Even for existing homes, buyers may purchase new refrigerators,
washers, dryers, and furniture.
• Consumer Credit. This report measures consumer credit that is outstanding.
Since one of U.S. consumers’ pasttimes is to “charge” goods
and services to their credit cards, the overall changes in consumer
credit can indicate the condition of individual consumer finances. On
one hand, economic activity is stimulated when consumers borrow
within their means to buy cars and other major purchases. On the other
hand, if consumers pile up too much debt relative to their income lev-
els, they may have to stop spending on new goods and services just to
pay off old debts. That could put a big dent in future economic growth.
The demand for credit can also have a direct effect on interest rates. If
the demand to borrow money exceeds the supply of willing lenders, interest
rates rise. If credit demand falls and many willing lenders are
fighting for customers, they may offer lower interest rates to attract
business.
• Business Inventories. Alan Greenspan watched this report; you
should become familiar with it as well. This report shows the dollar
amount of inventories held by manufacturers, wholesalers, and retailers.
The level of inventories in relation to sales is an important indicator
for the future direction of factory production.
• Consumer Confidence. There are several such surveys that gauge
consumer attitudes; one is the Conference Board, and another is the
University of Michigan. These reports reveal both the present situation
and expectations regarding economic conditions. The level of consumer
confidence is generally assumed to be directly related to the
strength or weakness for consumer spending. Generally speaking,
the more confident consumers are about their own personal finances,
the more likely they are to spend. Think of how you act and feel as a
“consumer.” If you have money in the bank and feel confident that your
job is secure, buying an extra gadget or splurging on a night out usually
won’t be trouble, right? But if times are tough, then the purse strings
get pulled in, correct?
Source: Forex Conquered: High Probability Systems and Strategies for Active Traders
