Unemployment rate is the percentage of the total labor force that is unemployed but actively seeking employment and willing to work.
From 1948 to 2004, the monthly U.S. unemployment rate has ranged between about 2.5% to 10.8%, averaging approximately 5.6%. The unemployment rate is considered a lagging indicator, confirming but not foreshadowing long-term market trends.
Consumer Price Index – CPI
The Consumer Price Index (CPI) is considered the most widely used measure of inflation and is regarded as an indicator of the effectiveness of government policy. The CPI is a basket of consumer goods (and services) tracked from month to month (excluding taxes). These goods include everything from the price of diapers and milk to funeral expenses. CPI figures are collected in 87 areas throughout the U.S. from over 22,000 retail and service establishments. Rent paid by individuals is also collected from 50,000 landlords and tenants.
The CPI index is available for two different population groups: one for “All Urban Consumers (CPI-U)”, and the other for “Urban Wage Earners and Clerical Workers (CPI-W)”. The bureau of labor has estimated that the CPI-U covers all expenditures made by wage earners and represents approximately 87% of the total U.S. population. The CPI-W only includes hourly wage earners and clerical workers, this covers approximately 32% of the population.
The CPI is one of the most followed economic indicators and considered to be a big market mover. A rising CPI indicates inflation, a large increase is something financial markets don’t like to hear. Inflation is the rate at which the general price for goods and services is rising, and subsequently our purchasing power is falling. As inflation rises this means that every dollar you own will buy a less percentage of a good or service. The federal reserve typically battles rising inflation by increasing short term interest rates. Rising rates are frowned upon by corporations and investors because the cost of borrowing money increases.
Pay close attention to the “core rate” as this excludes volatile energy and food prices to give a more stringent measure of general prices. The financial markets usually look for the CPI to rise at an annual rate of 1-2%, anything over this is a warning about growing inflation.
Housing starts tracks how many new single-family homes or buildings were constructed throughout the month. For the survey each house and each single apartment are counted as one housing start, (a building with 200 apartments would be counted as 200 housing starts). The figures include all private and publicly owned units, with the only exception being mobile homes which are not counted.
Most of the housing start data is collected through applications and permits for building homes. The housing start data is offered in an unadjusted and a seasonally adjusted format.
This indicator isn’t a huge market mover, but it has been reported by U.S. Census that the housing industry represents over 25% of investment dollars and a 5% value of the overall economy. Housing starts are considered to be a leading indicator, meaning it detects trends in the economy looking forward. Declining housing starts show a slowing economy, while increases in housing activity can pull an economy out of a downturn. Be careful though, a considerably stronger report is not good because it can be interpreted that growth is extremely strong and could lead to high inflation.
The fact that housing is closely related to mortgage rates means that housing starts data has a strong effect on the bond market and predictions for interest rate movements. As interest rates rise it is expected that housing starts will decline.
Consumer Confidence Index
The Consumer Confidence Index (CCI) is put out by The Conference Board. (There are others such as the Michigan Sentiment Index which is put out monthly by the University of Michigan). The Consumer Confidence Survey is based on a sample of 5,000 U.S. Households and is considered one of the most accurate indicators of confidence. It even goes as far as calculating the number of “help wanted” ads in newspapers to detect how tight the job market is.
The idea behind consumer confidence is that when the economy warrants more jobs, increased wages, and lower interest rates, it increases our confidence and spending power. Look for trend changes, many people use a moving average (3-6 months). Should the index move above or below the moving average it is a good indication that consumer confidence is significant. Month to month changes are not considered to have as great an impact as the overall trend.
Confidence is looked at closely by the Federal Reserve when determining interest rates, which affect stock prices. Lowering interest rates make it easier to borrow which ultimately supports consumer spending and higher confidence – something the stock markets love to hear. Keep in mind that lowering interest rates is not an instantaneous confidence booster, it can take 6-8 months for rate cuts to work their way into the economy. On the other hand, if confidence is rising rapidly it could trigger higher inflation.
Gross Domestic Product – GDP
GDP is a gross measure of market activity. It represents the monetary value of all the goods and services produced by an economy over a specified period. This includes consumption, government purchases, investments and the trade balance (exports minus imports). The GDP is perhaps the greatest indicator of the economic health of a country. It is usually measured on a yearly basis, but quarterly stats are also released. The Commerce Department releases an “advance report” on the last day of each quarter. Within a month it follows up with the “preliminary report” and then the “final report” is released another month later.
The GDP is presented in two ways:
– “current dollars” which represent actual prices in every period.
– “constant dollars” which abstract from changing prices over time.
The “current dollar GDP” equals the market value of goods and services produced. Meanwhile the “constant dollar GDP”, also known the real GDP, represents the quantity of economic output, which is used in measuring the overall rate of economic growth.
The most recent GDP figures have a relatively high importance to the markets. GDP indicates the pace at which a country’s economy is growing (or shrinking). If GDP growth fails to meet or beat the market expectations stocks can temporarily pay the price.
Traditionally, the U.S. Economy’s average growth rate has been between 2.5 – 3%. Economists believe that this range represents the sustainable long-run growth rate of output.
Producer Price Index – PPI
The Producer Price Index is not as widely used as the CPI, but it is still considered to be a good indicator of inflation. Formerly known as the “Wholesale Price Index”, the PPI is a basket of various indexes covering a wide range of areas affecting domestic producers. The PPI includes industries such as goods manufacturing, fishing, agriculture, and other commodities. Each month approximately 100,000 prices are collected from 30,000 production and manufacturing firms.
There are three primary areas that make up the PPI. These are industry-based, commodity-based, stage-of-processing goods.
The PPI is another important indicator which investors pay close attention to. It is not as strong as the CPI in detecting inflation, but because it includes goods being produced it is often a forecast of future CPI releases.
The PPI is also used extensively used by company officials for determining future supply or sales contracts. For example, a sudden rise in the PPI could mean that future sales contracts will also rise.
Purchasing Managers Index (PMI)
The PMI is a composite index that is based on five major indicators including: new orders, inventory levels, production, supplier deliveries, and the employment environment. Each indicator has a different weight and the data is adjusted for seasonal factors. The Association of Purchasing Managers surveys over 300 purchasing managers nationwide who represent 20 different industries.
A PMI index over 50 indicates that manufacturing is expanding while anything below 50 means that the industry is contracting.
The PMI report is an extremely important indicator for the financial markets as it is the best indicator of factory production. The index is popular for detecting inflationary pressure as well as manufacturing economic activity, both of which investors pay close attention to. The PMI is not as strong as the CPI in detecting inflation, but because the data is released one day after the month it is very timely.
Should the PMI report an unexpected change, it is usually followed by a quick reaction in stocks. One especially key area of the report is growth in new orders, which predicts manufacturing activity in future months.
A statistic researched, recorded and reported by the U.S. Bureau of Labor Statistics intended to represent the total number of paid U.S. workers of any business, excluding the following employees:
– general government employees
– private household employees
– employees of nonprofit organizations that provide assistance to individuals
– farm employees
This monthly report also includes estimates on the average work week and the average weekly earnings of all non-farm employees.
The total non-farm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. The non-farm payroll statistic is reported monthly, on the first Friday of the month, and is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity.
The actions of a central bank, currency board, or other regulatory committee, that determine the size and rate of growth of the money supply, which in turn affects interest rates.
A monetary policy is the means by which a central bank (also known as the “bank’s bank”) influences the demand, supply and, hence, price of money and credit in order to direct a nation’s economic objectives. Following the Federal Reserve Act of 1913, the Federal Reserve (the U.S. central bank) was given the authority to formulate U.S. monetary policy. To do this, the Federal Reserve uses three tools: open market operations, the discount rate and reserve requirements.
The monthly effective rate paid (or received, if you are a creditor) on borrowed money. Expressed as a percentage of the sum borrowed.
Borrowing $1,000 at a 6% interest rate means that you would pay $60 in interest.
Federal Fund Rate
The three instruments mentioned above are used together to determine the demand and supply of the money balances that depository institutions, such as commercial banks, hold at Federal Reserve banks. The dollar amount placed with the Federal Reserve in turn changes the federal fund rate. This is the interest rate at which banks and other depository institutions lend their Federal Bank deposits to other depository institutions – banks will often borrow money from each other to cover their customers’ demands from one day to the next. So, the federal fund rate is essentially the interest rate that one bank charges another for borrowing money overnight. The money loaned out has been deposited into the Federal Reserve based on the country’s monetary policy.
The federal fund rate is what establishes other short-term and long-term interest rates and foreign currency exchange rates. It also influences other economic phenomena, such as inflation. To determine any adjustments that may be made to monetary policy and the federal fund rate, the FOMC meets eight times a year to review the nation’s economic situation in relation to economic goals and the global financial situation.
Open Market Operations
Open market operations are essentially the buying and selling of government-issued securities (such as U.S. T-bills) by the Federal Reserve. It is the primary method by which monetary policy is formulated. The short-term purpose of these operations is to obtain a preferred amount of reserves held by the central bank and/or to alter the price of money through the federal fund rate.
When the Federal Reserve decides to buy T-bills from the market, its aim is to increase liquidity in the market, or the supply of money, which decreases the cost of borrowing, or the interest rate.
On the other hand, a decision to sell T-bills to the market is a signal that the interest rate will be increased. This is because the action will take money out of the market (too much liquidity can result in inflation), therefore increasing the demand for money and its cost of borrowing.
The Discount Rate
The discount rate is essentially the interest rate that banks and other depository institutions are charged to borrow from the Federal Reserve. Under the federal program, qualified depository institutions can receive credit under three different facilities: primary credit, secondary credit and seasonal credit. Each form of credit has its own interest rate, but the primary rate is generally referred to as the discount rate.
The primary rate is used for short-term loans, which are basically extended overnight to banking and depository facilities with a solid financial reputation. This rate is usually put above the short-term market-rate levels. The secondary credit rate is slightly higher than the primary rate and is extended to facilities that have liquidity problems or severe financial crises. Finally, seasonal credit is for institutions that need extra support on a seasonal basis, such as a farmer’s bank. Seasonal credit rates are established from an average of chosen market rates.