Assessing the Health of Economies Lesson 1 Economic Indicators

Economic Indicators Aim: Do Now: 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

4. Consumer Confidence (continued) Economic Indicators 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. 4. Consumer Confidence (continued)

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 How can investors gain a sense of the state of the economy? Where can we find a breakdown of economic indicators and when they will be made public? 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? If the U.S. announces 3% growth in GDP, what will determine how invests react? What indicators help investors assess the state of the economy? Examine a variety of economic indicators. The Bloomberg Economic Calendar available at Bloomberg.com The lag time. Whether the 3% growth was greater or less than what leading economists were expecting. With the market being efficient, the consensus of leading economists will be priced into stocks. For example, if economists were expecting economic growth of 4%, then news of 3% growth will be viewed as a disappointment. Employment, inflation, gross domestic product, consumer confidence and housing.

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: 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). 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?