Assessing the Health
of Economies
Lesson 1
Economic Indicators
Economic Indicators
Aim:
 What indicators help investors assess
the state of the economy?
Do Now:
 Identify what area of the economy a
college student with a year or two until
graduation will be most interested in.
Economic Indicators
 Do Now answer: The student is
relatively close to entering the job market.
Therefore, statistics related to
employment, such as the unemployment
rate and new claims for unemployment will
likely be watched closely.
Economic Indicators
Economic indicators are measurements of
different aspects of the US economy that signify
strengths and weaknesses.
Economic indicators can strongly influence
movements in financial markets. However,
studying economic indicators can be challenging
because there is a large volume of economic
data that is released on a daily basis.
Economic Indicators
While each indicator alone cannot provide a
full consensus about the state of the
economy. These indicators can be evaluated
together to make conclusions about the
economy.
Economic Indicator Calendar
The Bloomberg site provides a monthly Economic
Calendar identifying when each of the reports are
released. This calendar, in the market data section
of the site, allows the viewer to click on different
reports and see how the different indicators can
affect the economy.
Economic Indicator Calendar
Key economic
indicators (also called
market movers) are
highlighted. The
calendar URL:
bloomberg.com/
markets/
economic-calendar/
Global Economic Indicators
In a global market, it is important to study not only
US economic indicators, but also indicators of other
countries, especially industrialized nations such as
the United Kingdom, Japan and major Euro-zone
countries (i.e. Germany and France). This
compounds the number of economic indicators that
must be followed.
Note: The study of these other
indicators is beyond our scope.
Economic Indicators
Note: In this module, we focus on US
economic indicators. However, the same (or
similar) indicators are released in foreign
countries.
Key Economic Indicators
Some economic
indicators are much
more influential
than others. The
relative
importance of
these economic
indicators can
change over time.
In particular, the
markets will place
more emphasis on
economic indicators
they believe that the
Federal Reserve is
following in their
assessment of the
strength of the US
economy.
Key Economic Indicators
The economic indicators and the lag time differ within a
period covered. Lag time is the time between the
period the announcement covers and its release date.
What drives financial market movements is not the
“actual data” that is released but, rather, how this
“actual data” compares with “the consensus forecast”
– what major economists are predicting. Remember,
financial markets are “efficient,” meaning all available
market information, including the consensus forecast,
is built into security prices.
Economic Indicators
1. Employment
Employment Situation: Released monthly the
first Friday of the following month and breaks
down the employment situation
demographically by industry, sector, and
geographic region.
Economic Indicators
Employment Situation (continued): The
Employment Situation covers more than 500
industries and a few hundred metropolitan
areas. The most watched data of the report is
the new non-farm payroll which shows how
many jobs were created in the previous
month outside of the agriculture sector.
Economic Indicators
Employement - Nonfarm Payrolls
Economic Indicators
New Jobless Claims: The jobless claims
report is released every Thursday and it
shows the number of individuals who
filed for unemployment benefits for the
first time.
If the number of first-time files
decreases, it indicates a positive trend;
but if the number of first-time files
increases, it indicates a negative.
Because jobless claims are released
weekly, data may be volatile.
Economic Indicators
Employment – New jobless claims
Economic Indicators
2. Inflation
Consumer Price Index (CPI): The
CPI is a measure of inflation at the
retail level and is released monthly.
It shows the price change for a fixed
basket of goods bought by an
average working class family. This
index is important because it is used
to adjust many different contracts
that affect living standards (wages,
rent, social security benefits).
Economic Indicators
Producer Price Index (PPI): The PPI is a measure
of inflation at the wholesale level. The index
calculates the price change of the raw materials
that go into the basket of finished goods.
Economic Indicators
2. Inflation- Producer Price Index
Economic Indicators
Core CPI and PPI: The Core CPI and Core PPI
removes food and energy from the price change
calculation. Food and energy are considered the
most volatile elements of the indexes. They are
removed from the core calculation in order to
obtain a more accurate picture of actual price
changes occurring in the economy.
Economic Indicators
3. Gross Domestic Product (GDP)
• The GDP is a sum of all of a country’s
production within a quarter. The US GDP is
released quarterly. GDP is the most
comprehensive economic indicator. A higher
GDP points to a stronger economy. GDP also
can be divided by the population (GDP per
capita) to show a country’s standard of living.
Economic Indicators
3. Gross Domestic Product (GDP)
(Continued)
GDP = C + I + G + NX
C = Consumption
I = Investments
G = Government Spending
NX = Net Exports = Exports - Imports
Economic Indicators
3. Gross Domestic Product (continued)
Gross Domestic Product is revised in each of
the two months after the initial release. For
example, GDP for the first quarter is released
in April and revised in May and June. These
releases can vary substantially.
The three GDP figures next are for the first
quarter in 2013. As you can see, the actual
GDP changed with each revision from the GDP
released in April to the GDP released in June.
Economic Indicators
Gross Domestic Product (GDP) continued
Economic Indicators
4. Consumer Confidence
• Every month, American consumers and
households are surveyed regarding their
views of the economy and employment
Economic Indicators
4. Consumer
Confidence
(continued)
Consumer confidence in the economy can have a great effect
on stocks and bond prices. For example, in a recessionary
economy, where unemployment is high, consumers will be
reluctant to purchase goods and services, adversely affecting
economic growth.
Economic Indicators
US Consumer Confidence Index: A monthly survey of
5,000 households taken by The Conference Board
that provides a measure of how confident consumers
are about the economy.
Economic Indicators
Michigan Consumer Sentiment Index: A monthly survey conducted
by the University of Michigan that conducts telephone surveys in
order to gauge the overall consumer economic expectations.
Retail Sales: A measure of how much and what goods consumers
are buying from data collected by the US Census Bureau. This data is
released in the middle of each month for the previous month. This
indicator is important because retail sales make up about half of
total consumer spending and a third of the total economic activity.
Strong retail sales data can indicate a high degree of consumer
confidence.
Economic Indicators
5. Housing
• Housing Market Index: A monthly
report; surveying members of the
National Association of Home
Builders; that gauges their
perceptions of the overall economy
and the housing market. This
indicator is similar to the Consumer
Confidence indictor because it
identifies how willing people are to
buy homes.
Economic Indicators
5. Housing
• Housing Market Index
(continued): A willingness to buy
a home shows confidence but an
aversion to buy a home indicates
consumer uncertainty in the
economy.
• Other housing indicators are
Housing Starts, Building Permits,
New Home Sales, and Existing
Home Sales.
Lesson Summary
1. How can investors gain a sense of the state of the
economy?
2. Where can we find a breakdown of economic
indicators and when they will be made public?
3. What do we call the time period between when a
period of over which economic data is being
measured and when the report on the
measurement is released?
4. If the U.S. announces 3% growth in GDP, what will
determine how invests react?
5. What indicators help investors assess the state of
the economy?
Web Challenge #1
Challenge: Critics say that the official
unemployment rate does not accurately reflect
the state of the workforce and whether people
who want jobs are getting them.
Research three criticisms of the official
unemployment rate. Then, identify your position
as to whether each is valid.
Hint: Research those who are excluded from
the official statistics.
Web Challenge #2
Challenge: For the most recently completed
calendar quarter for which there was a report:
1. the consensus economists’ GDP estimate
for the quarter that existed when the initial
results were announced, as well as how
long after the quarter the initial
announcement was made (ie: the lag time).
2. If either has occurred, the first and second
revision to the GDP, when they occurred and
how different they were from the earlier
report.
Web Challenge #3
Challenge: Because Social Security payments
to retirees are “indexed” (ie: adjusted) by the
amount of the Consumer Price Index (CPI), that
measure has become a “political football”.
There has been some discussion of using
Chained CPI instead. What is Chained CPI?
How does it differ from CPI? Why do advocates
say it is a better method for measuring changes
in the cost of living? What is the biggest
criticism of Chained CPI?