PDF Ebook The Trader’s Guide to Key Economic Indicators
Investing without understanding the economy is like taking a trip without knowing anything about the climate of your destination. Inclement weather can wreak havoc with a vacation, especially if it involves outdoor activities. Just so, putting hardearned money into the stock or bond market when economic conditions are unfavorable can destroy financial plans for a comfortable retirement, a new house, or a child’s college education.
No one understands this better than Wall Street investment banks, brokers, and research institutions. All of these have adopted a top-down approach to securities analysis that begins with a forecast of the general economic climate, including interest rate projections, currency forecasts, and estimates of domestic and foreign economic growth. In this, they are following one of the precepts laid down by Benjamin Graham and David Dodd in their 1940 investors’ bible, Security Analysis: “Economic forecasts provide essential underpinning for stock and bond market, industry, and company projections."
You don’t need to manage millions or billions of dollars, however, to study economic conditions andplan your investment strategy accordingly. You can get much of the same information that Wall Street professionals use in their analyses from the business sections of the nation’s newspapers, magazines, and evening news programs. Furthermore, you don’t need a degree in economics or mathematics to interpret this information. In fact, many graduates of such programs at the nation’s top universities find themselves entirely unprepared for the real world of finance. This book attempts to bridge the wide gap between the sometimes mind-numbing theories of textbook economics—the principles that are taught on college campuses across the country—and the everyday world of
Wall Street. It does so by focusing on a dozen economic indicators that are among the most important of any analyst’s or economist’s tools. Understanding these indicators will make the study of economics more palatable and exciting.
Over the past century, thousands of economic indicators have emerged, predicting everything from the demand for gasoline to the size of harvests. Some are more fun than functional, such as those claiming links between stock performance for the year and which conference, the NFC or the AFC, wins the Super Bowl, or whether women’s hemlines rise to midthigh or fall to midcalf. Others indicators are more serious, solidly based in economic observations. These range from the arcane—such as the indicator connecting the production level of titanium dioxide, an ingredient of pigments used in paints and plastics, with the demand for building materials—to the commonsensical. The price of copper, used in wiring and many other construction elements, for instance, has a clear relationship with the pace of housing activity. The same could be said of economic growth and railroad car loadings, shipping container production, wooden pallet shipments, and the manufacture of corrugated boxboard and packaging, all of which are connected with transporting freight or manufactured goods.
Over time, economists have weeded out the least successful indicators, based on the most dubious relationships, to arrive at a core of about fifty consistently reliable ones. This book presents the dozen that are must-haves in any analytical toolbox. Virtually all Wall Street economists use these indicators in the analyses and their writings. Federal Reserve officials conduct monetary policy with respect to the trends that these indicators project. They are also considered “must haves” in the sense that they are among the most accurate at depicting economic relationships as well as attendant market-movability. That is, each of these indicators at one time or another typically figures among the top-tier factors to engender big swings in the financial markets.
Some of the dozen indicators discussed are constructed by U.S. government agencies such as the U.S. Department of Commerce’s Census Bureau, the U.S. Department of Labor, and the Board of Governors of the Federal Reserve. Others are the products of private organizations such as the Institute for Supply Management, the Conference Board, and the University of Michigan. Some have excellent predictive powers. Others reflect principally the current state of the economy, and still others highlight industries that might outperform and so help identify the likely path of economic activity. All have one thing in common, however: In one way or another, they all relate to the business cycle.
Contents
Acknowledgments
Introduction
The Business Cycle
Indicators and the Markets
How to Use This Book
Who Can Benefit from This Book?
1 Gross Domestic Product
Evolution of an Indicator
Digging for the Data
- Some Definitions
GDP Versus GNP
Calculating GDP: The Aggregate Expenditure Approach
Nominal and Real Numbers
Deflators
National Income
Employee Compensation
Other Income Categories
GNP, GDP, and National Income
What Does It All Mean?
- GDP Growth
Deflators
Consumption Expenditures
Investment Spending
Government Spending
Net Exports
Final Sales
Corporate Profits
How to Use What You See
Tricks From the Trenches
2 Indices of Leading, Lagging, and Coincident Indicators
Evolution of an Indicator
Digging for the Data
- Coincident Index
Leading Economic Index
Lagging Index
What Does It All Mean?
- Coincident Index
Leading Economic Index
Lagging Index
How to Use What You See
Tricks From the Trenches
3 The Employment Situation
Evolution of an Indicator
Digging for the Data
- Household Survey (A Tables)
Establishment Survey (B Tables)
What Does It All Mean?
- Employment, Unemployment, and the Business Cycle
Inflation Indicators
Sentiment and Unemployment
Average Hours Worked and Temporary Workers
How to Use What You See
Tricks From the Trenches
4 Industrial Production and Capacity Utilization
Evolution of an Indicator
Digging for the Data
- Industrial Production
Capacity Utilization
What Does It All Mean?
- Industrial Production
Capacity Utilization
How to Use What You See
Trick From the Trenches
5 Institute for Supply Management Indices
Evolution of an Indicator
Digging for the Data
What Does It All Mean?
- PMI
ISM Employment Index
ISM Price Index
ISM Supplier Deliveries Index
ISM Non-Manufacturing Indices
How to Use What You See
Tricks From the Trenches
6 Manufacturers’ Shipments, Inventories, and Orders
Evolution of an Indicator
Digging for the Data
- Durable Goods Report
Factory Orders Report
What Does It All Mean?
- Durable Goods Report
Factory Orders Report
How to Use What You See
Tricks From the Trenches
7 Manufacturing and Trade Inventories and Sales
Evolution of an Indicator
Digging for the Data
What Does It All Mean?
- Inventories and the Business Cycle
Inventories-to-Sales Ratios
How to Use What You See
Trick From the Trenches
8 New Residential Construction
Evolution of an Indicator
Digging for the Data
What Does It All Mean?
- Influences on Residential Construction
Regional Differences
Housing and the Business Cycle
Single-Family Housing Starts
How to Use What You See
Tricks From the Trenches
9 Conference Board Consumer Confidence and
University of Michigan Consumer Sentiment Indices 175
Evolution of an Indicator
Digging for the Data
What Does It All Mean?
- The Expectation Indices
Confidence and Durables Spending
How to Use What You See
- Employment and Sentiment
Non economic Influences on Sentiment
Tricks From the Trenches
10 Advance Monthly Sales for Retail Trade and
Food Services
Evolution of an Indicator
Digging for the Data
- Surging Subcategories: Superstores and E-Commerce
What Does It All Mean?
- Total Retail and Food Service Sales, Nominal and Real Figures 200
Total Sales Excluding Motor Vehicles and Parts
GAFO
How to Use What You See
- Same-Store Sales
Seasonality
Tricks From the Trenches
11 Personal Income and Outlays
Evolution of an Indicator
Digging for the Data
- Personal Income
Personal Consumption Expenditures
Personal Savings
What Does It All Mean?
- Personal Income
Consumer Spending
Personal Savings Rate
How to Use What You See
Tricks From the Trenches
12 Consumer and Producer Price Indices
Evolution of an Indicator
- Producer Price Index
Consumer Price Index
Digging for the Data
- Consumer Price Index Data Sources
Producer Price Index Data Sources
Calculating the Inflation Rate
What Does It All Mean?
- Price Trends
Price Indices and the Markets
Price Indices and the Business Cycle
How to Use What You See
Tricks From the Trenches
References
Index
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PDF Ebook The Trader’s Guide to Key Economic Indicators
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