The purpose of this writing is to give a quick summary of important economic indicators which have the ability to influence the markets. Every week or every month some kind of statistics pertaining to either general U.S. economy or producer/consumer interest hits the markets. Sometimes this information is overwhelming for people new to the financial markets and it is especially important to know what to look for and how to interpret these indicators. The following are some basic important economic indicators with out any order of significance. (Click charts to enlarge.)
Institute for Supply Management Manufacturing Survey [ISM]: This is the first monthly report focusing on the manufacturing sector of the economy. ISM computes a measure called The Purchasing Managers Index (PMI) based on the survey responses from purchasing managers with regard to manufacturing. Generally if the PMI is above 50, it indicates an expanding manufacturing sector and a reading below 50 indicate a contracting manufacturing sector. The following graph indicates the PMI index history for the last one year. Except in January 2008, the PMI index is declining continuously which indicates that the manufacturing sector is contracting.
Employment Report: This report is generally released on the first Friday of each month and has significant impact on the market. A better than expected employment report is good for the stock market and a weaker employment report is considered good for the bonds. As you can see from the graph, total non farm employment increased steadily till December 2007. From its peak in December 2007, the U.S. economy lost a total of 260,000 jobs. According to the BLS May 2 press release, employment continued to decline in construction, manufacturing, and retail trade, while jobs were added in health care and in professional services.
Gross Domestic Product: It represents the total value of all goods and services made in the U.S. and measures how fast or slow the economy is expanding. This is a quarterly report released by the Bureau of Economic Analysis. For the U.S. economy to grow smoothly, economists expect at least 3% real annual growth in GDP. If you look at the graph for the last two quarters, GDP grew at only 0.6% which is not enough to support the economic activity. As a result, in the last two quarters U.S. economy experienced job cuts and this is evident from the previous graph.
Personal Income and Outlays: This report shows how much Americans earn, spend and were able to save. According to the latest BEA report, disposable personal income (DPI) increased 0.3% where as personal consumption expenditures (PCE) increased at 0.4%.
When you subtract all the outlays from DPI, what remains is savings. American consumers are showing no interest in savings and the saving rate dropped gradually to almost 0%. Even though consumer spending is the key for U.S. economic growth, now it is reaching alarming proportions without any emergency reserves.
S&P/Case-Shiller Home Price Index: This index tracks the changes in residential real estate market in 20 metropolitan regions in the U.S. This report is released monthly and the values are published with a two month lag. The index has a base value of 100 in 2000 and reached 200 by 2006. This implies that housing values were doubled in a period of six years. From its peak in 2006, the housing market gave up nearly 25% of previous gains in the last two years. House is the biggest asset for an average American family and any changes in its values will have broader implications on the economy.
This is not an exhaustive list of indicators, by any means. It is also a good idea to keep track of consumer price index, retail sales data, shape of the yield curve, and federal open market committee statements to get a whole picture about the state of the economy.