10 most important economic indicators that every investor should pay attention to for the big piture is listed in reverse order, and this post also explains how each of them has an impact on the stock market. As investors, we should all know about CPI, PPI, ECI, and GDP.
10. Durable Goods OrdersThis is a government index that measures the dollar volume of orders, shipments, and unfilled orders of durable goods. Durable goods are new or used items generally with a normal life expectancy of three years or more.
This report gives us information on the strength of demand for US manufactured durable goods, from both domestic and foreign sources. When the index is decreasing (fell by -1% in December, 2008), it suggests demand is weakening, which will probably result in decresing production and employment.
9. Personal Income and ConsumptionAlso known as Personal Income and Outlays. Personal Income represents the income that households receive from all sources, including employment, self employment, investments, and transfer payments.
Income is the major determinant of spending (US consumers spend approximately 95 cents of each new dollar) and consumer spending accounts for two-thirds of economy. Greater spending spurs corporate profits and benefits. If more spending will help the economy recover, the US consumers have less than 5 cents of each new dollar more to help the economy to recover. Not too much room ahead compared to China and Japan which has 30% saving rate!
8. Employment Cost Index (ECI)The ECI is designed to measure the change in the cost of labor, including wages and salaries as well as benefits.
It is useful in evaluating wage trends and the risk of wage inflation/deflation. If wage deflation threatens, it's likely that interest rate will go down, then bond and stock prices will rise. With Fed's rate at 0 - 0.25%, how much room do you think the Fed still has to help the stock market?
7. Producer Price Index (PPI)The PPI measures the average price of a fixed basket of capital and consumer goods at the wholesale level. There are three primary publication structures for the PPI: industry, commodity, and stage-of-processing.
It's important to monitor the PPI excluding food and energy prices for its monthly stability. This is referred as the core PPI and gives a clearer picture of the underlying inflation trend. Inflationary Pressure is generated when the core PPI posts larger-than-expected gains. It's considered a precursor of consumer price inflation.
6. Consumer Price Index (CPI)The CPI measures the change in price of a representative basket of goods and services such as food, energy, housing, clothing, transportation, medical care, entertainment and education. It's also known as the cost-of-living index.
The rate of change of the core CPI (CPI excluding food and energy prices) is one of the key measures of inflation/deflation for the economy. Same as PPI, deflationary pressure is generated when the core CPI posts larger-than-expected losses. Deflationary pressure is not generally good thing for the stock market.
5. Consumer Confidence IndexA survey of 5000 consumers about their attitudes concerning the present situation and expectations regarding economic conditions conducted.
This report can be helpful in predicting sudden shifts in consumption patterns. Since consumer spending accounts for two-thirds of the economy, it gives us insights about the direction of the economy. However, only index changes of at least five points should be considered significant. According to the latest Consumer Confidence Index report, it's near a record low.
4. Existing Home SalesIn normal circumstances, this indicator will not make it to the 4th spot, but due to the housing market crash caused this economy crisis, I think it's more important to take a closer look at this indicator.
This report measures the selling rate of pre-owned houses. It's considered a more important indicator of activity in the housing sector than the new home sales, as it accounts for around 84% of all houses sold and is released earlier in the month.
This provides a gauge of not only the demand for housing, but the economy momentum. People have to be financially confident in order to buy a house.
3. Retail SalesThis index measures the total sales of goods by all retail establishments in the US. These figures are in current dollar, that is, they are not adjusted for inflation. However, the data are adjusted for seasonal, holiday and trading-day differences between the months of the year.
This is the most timely indicator of broad consumer spending patterns. It gives you a sense of the trends among different types of retailers. These trends can help you spot specific investment opportunities.
2. Beige BookEach Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from bank and branch directors and interviews with key businessmen, economists, market experts, and other sources. It summarizes this information by District and sector.
The Fed uses this report, along with other indicators, to determine interest rate policy at FOMC meetings. If the Beige Book portrays deflationary pressure, the Fed may decrease interest rates. But, where can the interest rates go anymore?
1. Gross Domestic Products (GDP)GDP measures the dollar value of all goods and services produced within the borders of the United States, regardless of who owns the assets or the nationality of the labor used in producing that output. Investor should monitor the real growth rates because they are adjusted to inflation.
This is the most comprehensive measure of the performance of the economy. Healthy GDP growth for US is between 2.0% - 2.5% when the unemployment rate is between 5.5% - 6.0%. As the unemployment rate might reach 12% by end of the year as indicated by some economists, GDP growth will take a while to get to the positive territory.
Summary:Almost all the economic inidicators currently reflect deflationary pressure, which means a decrease of interest rates becomes imminent. However, with the Fed's rate at 0 - 0.25%, Where is the room to cut the rate anymore? Where is the non-convensional method to help the economy right now? I just don't see it coming anytime soon.