The economy is the driving force being the investment market. When the economy is booming or recovering asset values tend to rise as new investors seek to buy into bullish trends. When the economy is sluggish or contracting asset values tend to fall as investors seek to cash out of the market. Some asset classes move counter to economic trends such as gold. Gold is seen as a safe haven investment and hedge against other assets so price tends to move lower in good times and higher in bad. The driving force behind all this movement is economic data. Economic data is collected, compiled and released by every country and government, and a few private sources, and released on a regular basis; weekly, monthly, quarterly or annually. Each tracks a different segment of the economy and together tell the story of economic contraction and growth cycles. This is a list of economic data points every investor should at least have a knowledge of.
GDP, Gross Domestic Product – Gross Domestic Product is the sum total of all business, construction, spending and consumption for a region. It is tracked most commonly by country but also on a global scale and on smaller scale in some cases. It is released on a quarterly basis and tracks long term trends that may take several quarters to several years to unfold. It is the broadest measure of an economy.
Non Farm Payrolls, Private Payrolls – Labor is one of the pillars of any economy. If the workers are happy and making money then the consumer is strong and the economy is should be running smoothly. Labor and labor markets are tracked in many ways the number one of which is through job creation, usually released monthly. Job creation is tracked by numbers like a non farm payrolls report, government data or reports from private payroll data. This data is volatile and seasonal, there are times of the year when employers are hiring or firing, so is tracked over time and relative to perceived healthy levels. Rising or falling job creation can be a sign of economic change.
Unemployment – Unemployment tracks the number of unemployed people within a population and is also released monthly. This data tracked on a monthly basis and gives insight into labor market health. Economist estimate an unemployment rate of 2-4% is proper for a healthy and expanding economy. Rising unemployment can be a sign of deteriorating economic conditions while declining unemployment is a sign of economic recovery.
Hours And Wages – Average weekly hours and average hourly earnings are another indication of the consumer and economic health. This data is released monthly. When employees are working more hours, or getting paid more wages, they make more money. This is an indication health in both the employers business as well ass the consumer; the employer is healthy enough to pay more, the consumer is getting paid more. When either is on the rise conditions are good, when both are on the rise conditions are really good.
Industrial Production – Industrial production measures the output of the industrial sector for a region or country. It is typically a diffusion index of several underlying measurements of the sector including output, new orders, shipments and labor. Industrial production is often seen as a leading indicator of the economy as a ramp up in production often preceded a time of economic strength.
Producer Price Index, PPI – The PPI is a monthly measure of price increases and decreases at a the producer level. It is seen as a leading indicator of inflation as an increase in producer level prices often precedes an increase in consumer level inflation. Rising inflation is bad for the economy as it can lead to tightened fiscal policy and an end to economic boom. Economists like to see inflation run near 2% at the core level. This figure is broken down into component parts excluding automobiles, food and energy. Changes are tracked from month to month as well as year over year.
CPI, Consumer Price Index – The CPI is a monthly measure of consumer level inflation. It is considered to be a lagging indicator of inflation and the economy because it is one of the last measurements to show effects of upward price pressure and economic boom. CPI is also broken down into component indices excluding autos, food and energy, and is also tracked month to month and year over year. Changes in CPI and PPI can indicate changes in fiscal policy.
Purchasing Managers Index, PMI – The purchasing managers index is a gauge of health in the manufacturing sector. It is released on a monthly basis and tracked month to month as well as year to year. It tracks new orders, shipments, inventories, production and employment. PMI data ranges between 0 and 100 with 50 a state of economic equilibrium showing no growth or contraction. PMI is tracked by governments as well as private sources. It is also measured for the services sector in a separate release.
The Index Of Leading Economic Indicators, LEI – The Index of LEI is a composite index of economic factors thought to precede times of economic expansion. It is released on a month to month basis and tracked as a % rise/fall from the previous month. Three consecutive months rising or falling LEI is viewed as a possible turning point in the economy. Within this report are two complimentary indices, the Index of Coincident Economic Indicators and the Index of Lagging Economic Indicators.
Retail Sales – Retail Sales is the sum total of all retail transactions for a country or region. It is tracked on a month to month basis and compared to itself month over month, year over year and ytd. It is also broken down into varying components such as ex-gasoline or ex-food. Retail sales is a leading or coincident indicator of economic conditions. As labor markets improve and household income rises so too does retail sales.
Consumer Spending – The sum total of all consumer spending. Break-downs of this sector include spending on discretionary spending and staples. Gains or declines in either are significant but for different reasons. Discretionary spending is money spent on things the average consumer doesn’t need and can be easily cut from budgets in times of economic uncertainty. Staples are items the average consumer does need and are only cut from consumer budgets in times of economic distress.
Automobile and Truck Sales – The automobile industry is a driving force of all developed nations. It represents a significant portion of the manufacturing, industrial production and employment segments of their GDP and is tracked on a number of levels. The most common is through auto and truck sales. Rising sales is a sign of increasing production, increasing employment and increasing earnings for both the auto companies, their employees and all associated with the industry. Auto sales are released monthly by the big automakers and tracked for monthly gains, year over year gains and ytd gains.
Construction Spending – Construction spending is a measure of the amount of money spent on new construction. It is tracked on a monthly basis and broken down into two categories; residential and business. Residential spending is any new construction intended for living space such as houses, duplexes and apartments. A rise in spending is a sign of economic health.
Home Sales, Existing, New and Pending – The real estate/housing market is another driving force of developed economies. It consists of the construction and sale of new and existing homes. This data is tracked in a number of ways including pending, existing and new home sales. Pending home sales is the number of signed contracts to buy and is seen as a leading indicator. Not all contracts result in sales but a rise in signings typically signals a rise in sales 1 to 2 months down the road. Existing home sales is the number of already built homes sold in a given month. This is important because sellers are typically seen as gaining wealth while buyers are seen as establishing it. When there are more buyers than sellers home prices tend to rise. New home sales is the number of new homes on the market. An increase in new home sales is a sign of an expanding housing market and positive in term of economic activity and jobs creation.
Central Banks And Central Bank Policy – Most if not all nations have a central bank of some sort. The central bank is a regulatory body overseeing the banking system and monetary policy for a country or region. A few of the top to watch are the Federal Open Market Committee (FOMC, USA), the European Central Bank (ECB, EU), the Bank Of Japan (BOJ, Japan) and the People’s Bank Of China (PBOC, Ch). These banks affect every aspect of their respective economies as well as the global economy. Their primary tool is through interest rate policy which has been at historic lows over the past few years. Other tools include what has become known as Quantitative Easing but is essentially loosening of fiscal policy and creation of new money. These banks meet once a month, or every 6 weeks as is the case with the FOMC, and are watched closely by financial markets. A single ¼ point increase in interest rates can have an effect that reverberates through the market.