The Relevance of Economic Indicators to Financial Markets

Economic indicators can be broken down into 3 basic categories: Primary, Secondary, and Tertiary. Primary indicators are the ones that everyone should be paying attention to, secondary indicators are less important in determining the direction of the market but can often times serve to help evaluate primary indicators, and tertiary indicators are the ones that are only of interest to niche markets.

For this article we will focus on the Primary Economic Indicators and how to use them to determine the direction of the market. It is important to note that every analyst and economist out there has their own list of indicators, so we will be concentrating primarily on the three biggest indicators, and will provide a list of other ones as well should you be interest in doing more in-depth research on the topic.

 

Primary Economic Indicators

Gross Domestic Product

The gross domestic product represents the total production of a country, and is the biggest indicator of how well an economy is doing. During times of expansion this number will increase, and likewise decrease during times of recession. There are different methods used to calculate this number, which is handled by the National Income and Product Accounts division of the Commerce Department.

If you were to look at the recent history of the GDP you would see that the American Economy bottomed out in 2009, had a small contraction in 2010, and is now back on a path of recovery. However, this is only one piece of the puzzle, and the rest of the economic indicators need to be taken into account as well.

 

Consumer Price Index

Produced by the U.S. Bureau of Labor Statistics under the U.S. Department of Labor, the CPI is an overall indicator of inflation. Interestingly, it is an index, meaning that it is not an absolute measurement, but a comparison to the average cost of goods from January of 1982 through January of 1984. This average was then set to 100. The current CPI is 221, which means that goods on average will cost you 121% more than they did in the 1982-1984 period.

While it may seem that inflation is undesirable, it is necessary in capitalistic systems. What is important is that stays constant and controlled. For example, if a country prints off too much money, inflation can spiral out of control, but periods of deflation (a downtrend in prices) or disinflation (a lowering of the rate of inflation) are also indicators of serious economic troubles. Stagflation, a condition which occurred in the 1970’s is when the normal means of controlling inflation had the opposite than the desired effect.

Certainly, looking at the CPI from the last several years you can see that America is currently in a period of disinflation. While the CPI has continued to rise, is hasn’t been by much, and between 2008 and 2009, when GDP contracted, it only rose by 0.063 points.

 

Employment Situation Report

Prepared on a monthly basis by the U.S. Bureau of Labor Statistics under the U.S. Department of Labor, the employment situation report is a comprehensive report on how many people are employed, unemployed, and employment statistics across every non-farm market. Just watching the unemployment rate will not give you a complete picture of how the economy is trending because it lacks a lot of this data, only accounting for those that are currently receiving unemployment benefits. However, the employment situation report also gives you the numbers of people not in the labor force, so by studying historic numbers verses current ones, you can get a more accurate picture of how many people are unemployed that aren’t receiving benefits. It also gives a breakdown of how many people are employed by different markets, manufacturing jobs, construction jobs, etc. Because of this you can see which markets are either contracting or expanding, and since the report comes out on a monthly basis it is the timeliest of these three indicators.

 

News of Business and Economy

Major announcements from the news media must be taken into account. Often times developing stories have a major impact on different financial markets. One thing to consider if you are trading in stocks instead of investing is that the professional brokers and traders have access to the news before you do, and there is actually a room that the reporters must stay in for one-half hour prior to emailing reports to their respective outlets. Although there are some free news resources available on the web, and on network television, the paid services offer

 

Other Primary Indicators

This is a list of the other macroeconomic primary indicators you should be regularly monitoring if you are interested in trading.

  • Personal Income Report
  • Housing Starts
  • Retail Sales
  • Durable Goods Orders
  • Institute for Supply Management Manufacturing Report
  • International Trade

Secondary and Tertiary Indicators

This list of indicators is also important to analyzing the economy, and I recommend learning about them if you’d like to have a full picture. Realize that these indicators are still important, but tend to be more specialized to their respective markets.

  • The Federal Open Market Committee Policy Announcement
  • Department of Energy Inventories
  • Consumer Sentiment
  • Motor Vehicle Sales
  • Individual Stock Reports
  • Money Supply Report
  • Import and Export Prices

 

Tying it All Together

You must understand the difference between trading and investment. Investments are long term strategies that are meant to build up your nest egg for retirement. On the other hand, trading is a short term strategy of buying low and selling high. When trading, you will also want to take into account individual stock histories along with the macroeconomic indicators.

For example maybe you are interested in trading telecom stocks. Recently AT&T announced their intent to buyout T-Mobile. This large of a merger requires approval by the FCC, and analysts are predicting that they will require AT&T to divest 40% of T-Mobile’s infrastructure to Sprint. Since this announcement AT&T stock has increased by about $3, not a huge amount, but if the Fed were to allow them to complete the merger without any divestment you could expect this number to shoot up even higher. Going back even further and comparing the current stock price to pre-recession levels, one can see that AT&T has quite a bit of room for growth. Because of these factors, as well as an announcement from President Obama that they plan to invest heavily into the telecom industry over the next 10 years, this stock would be a good choice both for trading and long term investment.

 

Bio: Alexis Bonari is currently a resident blogger at College Scholarships, where recently she’s been researching distance education loansand writing on the process of direct student loan consolidation. Whenever she gets some free time, she enjoys watching a good movie or experimenting in the kitchen with some fresh vegetables.

 

 

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