Top US Economic Indicators That Move The Markets

OK, so let’s assume that all is well in the world; there are no banking failures, politicians aren’t messing around with stimulus packages and the oil producers are one big happy family. What’s left to add a spark to the trading day?

Well each month there’s a healthy dose of economic data, riddled with dodgy numbers, to trade off. All we need to do is understand what the hell they’re talking about. I’m going to take a look at the top events in the good old US of A, explain their significance and what these silly names actually refer to. The US economic situation is viewed as the most important in the world since it is often the main driver of the global economy. What’s happening in the US has a large effect on not just the US markets but across all global commodity, FX and equity indices. So no better place to start.

First a word of warning, the ratio of words to pictures isn’t good so start by grabbing a strong coffee and perhaps a choc-chip cookie.

The important thing to note is that, just like the weather and advice on eating red meat, the relevance of these numbers change quite a bit. For example a decade or so ago money supply was all the rage, then the trade deficit topped the charts for months. When the credit crunch took off, the numbers for existing and new home sales were the big crowd-puller. There are some golden oldies that are always near the top of the charts - GDP, CPI inflation, retail sales and jobs data.

• Jobs
If we were dishing out marks for consistency, to reflect the economic event most likely to regularly keep traders at their desks over lunchtime, it would have to go to the Nonfarm Payrolls data. This silly name is just another way of saying ‘employment numbers’, or ‘how many jobs are available’. The jobs data is viewed as the Daddy of all economic reports because it’s pretty up to date and provides a broad look at the health of the economy. The creation of jobs is the backbone of the American Dream, leading to more wealth, consumer spending and larger houses. Alternatively, when jobs start to disappear, the reverse happens and the whole economy goes to the dogs.

The Payrolls data comes with several months’ worth of (often large) revisions and a few other numbers relating to the jobs market and level of earnings. In fact, this number is so damn important, I’ve already done an article just for Nonfarm Payrolls. But here’s a brief summary:

The main Payrolls Number is a business survey and measures the change in jobs (full time, part time and temporary), not workers. So if your hard-working immigrant finds three new jobs in the month that will count as 3, not 1. And get this; the most important number in the monthly calendar is based on a survey of only one third of the non-farm jobs.

Released at the same time is the Unemployment Rate. Now this is brilliant; this number is taken from a different source of around 60,000 households and counts people, not jobs. So our industrious immigrant only counts for one here. This different measure explains the regular contradiction of a rise in the number of jobs created and a rise in the level of unemployment (or vice-versa).

The ADP Employment Change number, released two days prior to the payrolls data, had its 15 minutes of fame when traders found it to be a good ‘heads up’ on the Payroll number. But after a more recent indifferent performance it’s returned to the celebrity C-list.

If you need your fix and can’t wait for the monthly figures, there’s Initial Jobless Claims data out every Thursday. This report provides a timely indicator of the direction of the economy.

• Prices
Not far behind Americans’ obsession with working and being paid is their concern over how much they have to pay for things. If you think of the Payrolls data as the Rolls Royce of economic numbers, then the CPI is probably a Merc, not far behind, plenty of followers and taken very seriously.

The CPI measures the cost of a basket of goods and services thought to be typical of an urban consumer’s spending (that’s the official wording; personally I can’t see my barber, mechanic and pizza delivery guy in any basket). The ‘core’ measure strips out food and energy (is the pizza guy still a service or food?) and just leaves the things that don’t go up in price, so it’s usually a much lower number. The basket is re-fixed every two years and the data is only subject to small annual revisions.

Now folks, we’re talking America here so there isn’t just one measure of inflation, no sir’ee. The PCE Deflator sprang to fame in February 2000 when the then Head of the Fed, Alan Greenspan, introduced it as the FOMC’s primary measure of inflation.

The PCE Deflator covers a broader base than the CPI; it includes non-profit organisations and measures all of the US, not just urban areas. The basket of goods gets a gold star for trendiness; it’s updated monthly to take account of changes in shoppers’ behaviour. This leads to regular revisions to the released data.

The Producer Prices Index deserves an honorary mention. There’s a whole menu of sub-indexes produced here, but the ones that the markets focus on are the ‘total’ and ‘core’ finished goods prices. That’s because the change in prices of finished goods is only one step away from the consumer, and as these numbers are usually released a day or two before the CPI they’re used as a crude indication of what to expect.

• Interest Rates
One event guaranteed to ruin the family tea is the (almost) monthly meeting of the Federal Open Markets Committee (the FOMC or Fed). This bunch of worthies meet 8 times a year to decide on US Interest Rates. The announcement and accompanying statement comes out at 7.15 in the evening (that’s in Ireland and UK time).

The interest rate decision is rarely a surprise so the excitement comes from the precise wording of the statement, where every sentence is dissected for hints of a bias towards raising or cutting rates. The key is to avoid a ‘neutral’ interpretation, as that’s just dull. Check these blogs for more detail on the impact of the interest rates and what central banks do.

Watch out for the FOMC Minutes, which are released about three weeks after the FOMC’s interest rate decision. Depending on how much uncertainty remains after the FOMC’s statement, the minutes can provide a large impact on the market. The assessment of the current economic conditions is vitally important to determining what future Federal Reserve policies lie around the corner.

And whilst we’re looking at the Federal Reserve, another key event is the Head of the Fed’s Semi-Annual Testimony. This is top-Dollar in the importance stakes as it’s the Fed Head’s chance to give his views on the economy.

• Growth
Continuing with the car theme, the Gross Domestic Product number is like a Triumph; it’s a classic, and attracts a lot of interest, but essentially it’s living in the past. The GDP is a measure of all goods and services produced in the economy and there’s enough detail to justify its own article (it would be a cure for insomnia). Essentially GDP is the sum of consumption (spending on goods and services), business investment (that’s in factories and widget makers, not shares) and government spending. You then need to take off imported goods and add exports.

The GDP data comes in a confusing array of numbers; there’s nominal and real GDP, along with the GDP deflator. The key number to look at is the annualised quarterly percentage change in real GDP. Do what!

Hold on, I’ll explain. GDP is reported in nominal and real terms. What ‘real’ means in this case is that it’s adjusted for inflation. For example, say nominal GDP is 6% and inflation is 4%, this would give a real GDP of 2%. The report will show the real GDP percentage figure for the previous quarter and what it looks like on an annual basis.

The trouble is, not only are the numbers historic, but they also have a credibility problem. A lot of the numbers just aren’t there in time for the first stab at the number, so the Bureau of Economic Analysis makes a few guesses. The GDP is a quarterly figure, but there are three stabs at getting it right in consecutive months as more of the data turns up in the post. This leads to some pretty substantial revisions and gives the impression of being a monthly release.

Because the GDP number is slow, late and not very accurate, there’re an increasing amount of business and consumer sentiment indicators to give a clue on the state of the economy.

• Business Surveys
Business surveys are important because there’s little delay between the survey responses and their release. This provides a pretty good idea of how industry is currently faring. The depth of detail varies in these surveys, but the standard questions relate to new orders, production, prices, employment, supply times and inventories. Here are the top business surveys:

Institute of Supply Management (ISM) - Manufacturing and Non-Manufacturing. The manufacturing survey asks over 400 firms five questions relating to their business. The headline number is a composite figure, but the ‘prices paid’ component gets a lot of attention. The non-manufacturing survey covers around 370 firms from agriculture, utilities, construction and other services. The survey asks a single question on business activity. In contrast to regional Fed surveys, this covers sentiment from the whole country.

Not wanting to be a drag on people’s times, the Philadelphia Fed survey asks 250 firms a single question on business activity. Historically, the Philly Fed (as it’s known) has been a good ‘heads up’ on what to expect from the ISM a few days later. There are many more regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. As the first released each month, the Philly Fed gives an indication on what the rest of them will look like so its given the most weight. Next in importance are the New York and Chicago surveys. A few, such as the Atlanta and Richmond Fed surveys, are released after the ISM and are of little value.

• Consumer Surveys
The consumer surveys tend to ask individuals about their current financial and employment situation and what they expect the situation to be 6-months down the road. One of the key questions, relevant to retailers like Home Depot and Wal-Mart, is the likelihood of making a major purchases in the next 6 months. Here are the top consumer surveys:

The University of Michigan Consumer Sentiment asks 200 people for the preliminary number, 500 for final, five questions relating to their financial position/expectations over a five-year horizon. Widely considered the best indicator of the confidence of the US consumer.

Also asking five questions to random members of the public is the Conference Board Consumer Confidence. It surveys 2500-3500 people about employment and business expectations over a 6-month horizon. It comes out later than the Michigan survey so isn’t as important.

Hey! That’s Not All
Also worth mentioning are the Earnings Reporting Seasons, though you’d be hard pressed to fit a game of squash in between the end of one season and the start of the next. But it’s well worth checking the paddypowertrader Weekly Wrap for when the top dogs are due to report earnings. And for the petrol heads the weekly Oil Inventories are something to be aware of, though their importance ebbs and flows with the volatility in the oil price.

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