Economic Indicators

Essential Economic Indicators

Gross Domestic Product (GDP) is the market value of all final goods and services produced within a single country.

Broadest, most comprehensive barometer of economic activity
- Formula:
  - = personal consumption (e.g., food)
  - = Private Investment (e.g., factory)
  - = Government consumption (e.g., battle ship)
  - = exports
  - = Imports
  - = net exports
Can see GDP with the ECST function on Terminal
First thing an investor wants to know when examining an economy is the % change in GDP from one year to the next
- GP Function
Look at Real GDP when analyzing an economy
- Measure of prosperity

Inflation is the general increase in the prices of goods and services which diminishes the purchasing power of money.

i.e. A unit of money tomorrow buys less than a unit of money today
Inflation erodes the value of bonds
2 Primary sources of inflation data in the US:
- GDP Report
  - Publisher: Bureau of Economic Analysis
  - Data Input: Based on whole economy
  - Frequency: Quarterly
  - Inflation Source: GDP Price Deflator
    - Most authoritative number
- Consumer Price Index (CPI)
  - Publisher: Bureau of Labor Statistics
  - Data Input: Basket of Goods and Services
  - Frequency: Monthly
  - Inflation Source: Labor Departments Inflation Report
  - For CPI to be an effective measure of inflation, it must be truly representative of consumer spending habits of that country
Inflation basket consists of the makeup of different goods and services individual effect on inflation

Overall increase in unemployment depresses GDP growth
Nonfarm payrolls
- Measures monthly change in the number of employees in the US excluding seasonal agricultural workers
- Most important unemployment indicator in the US

Businesses tend to make large investments and hire people when they believe there will be a lot of demand for their goods and services in the future
Institute for Supply Management (ISM)
- Has most widely followed index of US manufacturer activity
- Purchasing Managers Index (PMI)
  - Surveys people in charge of purchasing goods and services for corporations about business conditions
  - A reading above 50 signifies optimism
  - Below 50 signifies pessimism
  - Best leading indicator of GDP growth

The main indicator for residential housing construction is housing starts
House building only accounts for 3% of the US economy
So why is housing a good indicator
- Before house builders begin building houses, they must believe consumers are confident enough to assumer a 30 year mortgage
- After buying a new house, the owners buy many goods to furnish and finish it
- So in reality, residential housing construction contributes far more than 3% to the GDP

Real GDP growth is the main gauge of economic health
Economic growth is cyclical, with a series of booms and starts
- It is vital for an investor to track where it is in the cycle
Investors interpret the economy through economic indicators
Indicators with predictive qualities are highly prized by investors
- Called leading indicators

Imagine you are an investor and are eager to learn how the economy is performing at the beginning of the year.

Consumer price index (CPI) measures price increases for a standard basket of goods
- i.e. what the average consumer is most likely to consume
- Measures cost of living
Nonfarm payrolls is unemployment
GDP is growth
PMI is business confidence

Economic Surprise Monitor (ECSU) on Terminal shows 40 handpicked meaningful leading indicators for the US economy.

Shows most recent data release, projected, actual, and a positive or negative surprise
All the data is aggregated to comprise the Bloomberg US Economic Surprise Index