1. Economic Indicators

2. Concepts  Variables that provide information about the state of the economy.  Every economic indicator has a story to tell.  Need to be able to make sense of the entire picture.

3. GDP=C+I+G+NX  Consumption:  Retail sales  Consumer credit  Personal income and spending  Employment report  New claims for unemployment insurance  Consumer confidence  Auto sales  Chain store sales

4.  Investment  Nonresidential  Industrial production  Capacity utilization  Orders for durable goods  ISM surveys  Factory orders  Manufacturers’ shipments

5.  Investment  Residential  Housing starts  New single-family home sales  Existing home sales  Mortgage applications

6.  Government  Construction spending  Federal budget balance  Net Exports  International trade  Current account balance

7. Inflation  Consumer price index  Producer price index  Employment cost index  Non-farm productivity  Unit labor costs  Import and export prices  Employer costs for employee compensation

8. International Indicators  German industrial production  German consumer price index  Japan Industrial production  France monthly business survey  OECD composite leading indicator  China industrial production  Other major countries’ industrial production

9. Composite Indicators  Indicator composed of various series.  Bureau of Economic Analysis  Organization for Economic Cooperation and Development (OECD)  National Bureau of Economic Research  Private consulting firms

10. Cycle of the Indicator  Leading indicator: used to predict changes in the economy. Its trajectory changes before the economy follows a particular pattern. i.e. Conference Board LI  Coincident indicator: varies simultaneously with the business cycle. It indicates current economic conditions. i.e. industrial production  Lagged indicator: follows the business cycle with lags. It illustrates where the economy has been. i.e. corporate profits

11. Understanding Economic Indicators  Background Economic Theme: Recognize the stage of the business cycle.

12. Understanding Economic Indicators  Identify their breath in coverage.  Be aware of data revisions.

13. Handling an Economic Indicator  Real vs. Nominal values most professionals care about real values

14. Nominal vs Real

15. Handling an Economic Indicator  Original vs. adjusted series a) Trend – cycle b) Seasonal adjustment c) Moving Average

17. Handling an Economic Indicator  Growth rates a) Month to month or Quarter to Quarter b) Year to year

19. Handling Economic Indicators  Flows vs Stocks

20. Sample Report

21. GDP  Published by: Bureau of Economic Analysis  Frequency: Quarterly  Period Covered: prior quarter  Volatility: Moderate  Market significance: very high  Web site: www.bea.gov www.bea.gov  How do markets react? GDP ↑ > Stock market ↑ GDP ↑ > Bond market ↓ GDP ↑ > Dollar appreciates

22.  Some details: - best measure of economic activity - 3 estimates every quarter: a) Advance report: first month of the quarter. It is based on consumption information and some information on the other components of GDP. b) Preliminary report: second month of the quarter, includes almost all information. c) Revised (or final) report: third month of the quarter, includes all information.

23. - The GDP report contains two estimates of real GDP 1. Built from the final demand categories: C+I+G+NX 2. Built from the income side: Personal income and corporate profit by construction 1 = 2

24. - The GDP report contains information about inflation: 1. Implicit deflator: measures a combination of price changes and changes in the composition of GDP. Not a pure measure of inflation. 2. Fixed-weight deflator: provides a measure of price changes for a given basket of goods and services. It is a pure measure of inflation. 3. Chain weighted price deflator: the index allows the quantity of purchase-weights to vary over time. Hence, real output is based on contemporaneous spending patterns.

25. - Note that it is possible to use information on monthly indicators to forecast GDP EX. Personal consumption expenditures: -Durable goods -Non-durable goods - Services - Keys to interpreting the GDP report: a) Pay close attention to inventory changes, the behavior of inventories has significant implications for future growth.

26. b) Focus upon the GDP chain-weighted price index as the most comprehensive measure of prices in the economy. It is a more comprehensive price indicator than the CPI or the PPI. c) Look at the pace of exports and imports. It has implications for the exchange rate market. d) Keep in mind that, traditionally, revisions to the GDP figures have a significant impact on financial markets.

27. DATA Billions of current dollars 2004Q111457.1 2004Q211666.1 2004Q311818.8 2004Q411995.2 2005Q112198.8 2005Q212378 2005Q312605.7 2005Q412760.4

29. Forecast 2004Q111457.111156.28 2004Q211666.111361.65 2004Q311818.811544.5 2004Q411995.211734.3 2005Q112198.811919.73 2005Q21237812097.7 2005Q312605.712294.43 2005Q412760.412485.73 2006Q112581.37

30. Discussion  Based on the forecast provided by a Moving Average, the value of GDP for the first quarter of 2006 will be 12581.27 billions of dollars.  That number would imply an increase of 3 percent.  Hence, we can conclude that the economy will continue expanding.