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Economic indicators allow a glimpse into the overall status of the American economy. The Federal Reserve, economists and traders alike all utilize economic indicators to help interpret and understand the economic health of the country. Below is a list of certain economic indicators that should be monitored.
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Auto and Truck Sales |
| This measures the monthly sales of all vehicles built domestically. As a significant indicator of consumer demand, this number accounts for roughly 25% of total retail sales. Since the sale of automobiles and trucks tend to be sensitive to interest rates and consumer economic confidence on the whole (as a big ticket consumer expense) this indicator tends to lead when determining the business cycle. |
Business Inventories |
| This report entails sales and inventory statistics from the three stages of the manufacturing process: Manufacturing, wholesale and retail. The retail inventory figure is closely watched in this report, as the manufacturing and wholesale inventory numbers are release in previous reports. This report serves well as a coincident indicator since inventory levels point to the current strength of business sales: High inventories tend to indicate a lack of consumer spending. Conversely, low inventories tend to point toward increase consumer spending. On the whole, business inventories is a figure that is not a strong market mover. |
Construction Spending |
| This report outlines the spending for residential, non-residential and public new construction. Since the figures tend to change rather significantly month to month, it really does not impact the market greatly. However, if there were a spending trend over three or more months, it warrants greater consideration. |
Consumer Price Index (CPI) |
| A measure of the price level of a fixed market basket of goods and services purchased by consumers. The CPI is a significant indicator of inflation and used as a basis for cost of living adjustments. The CPI basket is comprised of many different good and services including food, energy, apparel, tobacco, airfares and new cars. Food and energy prices tend to be quite volatile and at times are not included in the CPI leaving what is known as the "core rate". In addition to the month to month changes in the CPI, the year to year changes are also observed to help determine the overall path of inflation. |
Durable Good Orders |
| This figure is a measure of the dollar volume of orders, shipments and unfilled orders of durable goods (generally possessing a lifespan of three years or more). This is a leading indicator of manufacturing activity and oftentimes spurns a movement in the market. It is not uncommon for this figure to be volatile based on one sector, so it is best to break down this indicator to its sector components to arrive at a broader indication of orders. |
Employment Cost Index |
| This index provides a look at total employment costs, wages and salaries and total benefit costs. As a lagging indicator the ECI does not play a significant role in moving the market, but provides a good look at shifting employment between industries and total benefit costs. A close eye should be kept on quarter to quarter and year to year changes to identify any trends. Drill down on any large swings in the ECI as it might be attributed to bonuses and large commission payouts. |
Existing Home Sales |
This reports provides the level of existing home sales – a good indicator of the overall activity in the housing sector. This figure is preceded by the housing starts report (supply side) and is a strong measure of the demand for homes. Sales are largely dependent on mortgage rates, tending to lag changes in interest rates by a few months. Generally, the end of a recession brings out strong housing sales, releasing the demand built up throughout the recession. Expect large swings during the winter months as bad weather typically affects sales.
It is also important to note two other figures in this report:
The inventory of homes for sale at the current sales pace is the inventory to sales ratio. An I/S figure of 6.0 indicates that the supply of homes for sale will deplete in six months at the current sales pace. As this figure heads lower, a greater need for housing starts arise, thus creating demand. Year to year changes in the median price for homes is a good indicator of the inflation in home prices.
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Factory Orders |
| The factory orders reports consists of the durable good report and the non-durable goods report. What is most significant in this report is the factory inventories component, which happens to be the first look at inventory levels for any month. Many economists tend to use the factory inventories to help forecast inventories in the GDP report. |
Gross Domestic Product (GDP) |
GDP is a broad measure of an economy’s health. It represents the monetary value of all the goods and services produced by an economy over a specified period of time. The GDP measure is announced on the last day of each quarter.
GDP includes consumption, government purchases, investments and the trade balance (exports minus imports). GDP is measured in current dollars (actual prices) and constant dollars (changing prices over time). The current dollar GDP is the market value of good and services produced. The constant dollar GDP, or real GDP, is the quantity of economic output used to measure the overall rate of economic growth.
The GDP is an excellent indicator of the pace at which the economy is expanding or shrinking and can affect the performance of the stock markets. As a quarterly indicator, it could be used a compliment to other monthly indicator, particularly inventory level indicators.
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Housing Starts and Building Permits |
| This report is a measure of the number of residential housing units that have started construction (beginning of excavation of the foundation). This requires a building permit. A rise in permits typically follows a reduction in mortgage rates. This report is broken down by regions: Northeast, Midwest, South and West. It is important to look at the component regions when analyzing the overall supply. Housing starts are considered a leading indicator as it is a forward looking statement of the economy. About 25% of investment dollars is plowed into housing starts. It also makes up about 5% of the overall economy. |
Industrial Production |
| This index is a measure of the output of factories, mines and utilities. Be aware of large swings in the utility production; severe climatic changes can boost production along with utilization. The rate of utility capacity utilization is key as it provides a gauge to the overall capacity of utilities. Since capacity is generally considered to follow a straight line year over year, when utilization rate reaches 85%, it can point toward inflationary pressures. However, it is important to gauge inflationary pressure concurrently with utility commodity prices and vendor deliveries. |
Initial Claims |
| Initial jobless claims is the number of filings for state jobless benefits. This figure is usually tracked on a month by month basis to determine if there is an underlying trend in jobless claims. This monthly inspection better facilitates an educated look at the direction of the economy. |
International Trade |
| This report is tracked to identify a trend in the overall trade balance between international trade partners. In addition to the International Trade report, export/import of good and services should be monitored as well. In particular, the export figure is important to watch for indications of a strong competitive position at home and/or abroad. This report can play an integral part of GDP forecasts. |
M2 |
| M2 is a category of the money supply that includes M1 (all physical money like coins, currency as well as demand deposits [checking and NOW accounts]) along with time-related deposits, savings deposits and non-institutional money-market funds. This figure should be viewed from an intermediate and long-term horizon. |
New Home Sales |
| This figure is the number of new residential houses sold and for sale. New home sales tend to lag interest rages. This level is stronger in a healthy economy and weaker on the brink of a recession. Not a widely used indicator, especially when compared to existing homes sales. |
Producer Price Index (PPI) |
| The Producer Price Index measure prices of good at the wholesale level. The three subcategories of the index are crude, intermediate and finished. The finished goods index is monitored the closest, since it is a representation of prices for goods that are ready for sale to the consumer. |
Productivity and Costs |
| This measures the productivity of workers and the costs associated with producing a unit of output. While this figure is generally not closely watched, during inflationary periods the Unit Labor Cost index in this report can move the markets. When productivity plunges, unit labor costs rise faster than hourly earnings and other labor cost measures. |
Regional Manufacturing Survey |
| This is a regional survey compiled by each Federal Reserve Bank district. Only two serve as important indicators. The Philadelphia survey, which is the first survey released in the month and the Chicago survey, released last. These surveys provide a score of indicators including new orders, production, employment, inventories, delivery times, prices, export and import orders. These reports can signal an expansion in the economy when they are above zero and a contraction in the economy when below zero. |
Retail Sales |
| A measure of the total sales for retail stores. This is closely followed as an indicator of consumer spending patterns. Auto sales are often not included in this measure, but instead considered separately as a part of the auto and truck sale measure. Close watch is warranted on the food and gas components, as they might be moved by price changes rather than consumer demand. This measure does not include services, which can comprise of nearly 50% of consumer spending. |
The Employment Report |
This report is comprised of two different reports. The household survey looks at 60,000 different households and produces the unemployment rate. The establishment survey looks at 375,000 different businesses producing a measure of non-farm payrolls, average workweek and average hourly earnings figures, amongst other measures. Both of these surveys measure employment levels, yet from a different angle. Together, they provide the most timely and comprehensive market indicator of economic activity on a monthly basis.
A few items to note about the employment report:
Particular attention should be given to the manufacturing component, as this component tends to lead the business cycle. The average workweek is critical since it determines industrial production and personal income. Average earnings are followed closely to help indicate the potential for inflation. If the price of labor is rising sharply, it is likely that too much money is chasing few employees.
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Consumer Confidence |
This is a survey of 5000 households to determine the level of consumer confidence. The two sub-indexes are consumers’ appraisal of current conditions and expectations for the future. The expectation index comprises of 60% of the overall index figure. This tends to be considered a leading indicator. Note that minor shifts are generally negligible; only larger shifts of 5 points or more should be considered significant.
The information provided herein is for general informational purposes only and should not be considered an individualized recommendation, personalized investment advice or an endorsement by Terra Nova. This information is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed and therefore should not be relied upon as such. |
