Main US Economic indicators (definition and impact)

Gross national product (GNP) and gross domestic product (GDP):

Gross domestic product (GDP) measures the total value of US output. It is the total of all economic activity in the US, regardless of whether the owners of the means of production reside in the US. It is “gross” because the depreciation of capital goods is not deducted.
GDP is measured in both current prices, which represent actual market prices, and constant prices, which measure changes in volume. Constant price, or real, GDP is current-price GDP adjusted for inflation.
The financial markets focus on the seasonally-adjusted annualised percentage change in real expenditure-based GDP in the current quarter compared to the previous quarter.
The difference between GDP and GNP is that GNP includes net factor income, or net earnings, from abroad. This is made up of the returns on US investment abroad (profits, investment income, workers’ remittances) minus the return on foreign investments in the US. It is national , because it belongs to US residents, but not domestic, since it is not derived solely from production in the US.
Given that US investment abroad is broadly similar to foreign investments in the US then GDP is approximately equal to GNP and the terms are often used interchangeably.

Impact on financial markets:
Financial market reaction to this economic indicator is often restrained since it is usually expected news, with many of its key components having already been published. A reaction will always be on an unexpected advance report.

GDP deflator:

The GDP deflators are comprehensive measures of inflation since they encompass changes in prices in all sectors of the economy, consumer products, capital goods, the foreign sector, and the government. In general it is calculated as:
GDP price deflator: (Nominal GDP/Real GDP)*100

There are actually three GDP deflators: the implicit price deflator, the fixed weight deflator, and the chain-price index. The implicit price deflator measures changes in prices as well as changes in the composition of output. Some goods are less expensive than other goods, so depending on the combination of goods and services produced in any given quarter, regardless of the price changes, the implicit price deflator can rise or fall. It is rare to see an outright decline in the implicit GDP deflator, but its rate of increase varies significantly from one quarter to the next.
The fixed weight deflator works on the same principle as the consumer and price indexes since it measures prices for a composition of GDP chosen in a certain time-period. Consequently, the fixed weight deflator only reflects changes in prices.
The chain-price index combines the variable and fixed weight baskets. For any given quarter, it shows the basket of goods of the previous quarter. Over time, however, the basket of goods is changing. Admittedly, this has questionable relevance to the inflation picture and gets little attention, if any.

How should you interpret it?
The fixed weight GDP deflator is more meaningful than the implicit price deflator. The implicit price deflator reflects changes in the composition of GDP as well as changes in prices. Although less frequent, reports such as these quarterly deflators might have less volatility than more frequent reports (such as the monthly indicators). Both the implicit and fixed weight GDP deflators can have quirks from time to time, as do the PPI and the CPI. For example, government pay rises typically occur in the first quarter, boosting the GDP deflator overall. Seasonal adjustment factor can not be used to account for annual pay rise because the magnitude of increase is not stable from year to year.

Impact on financial market
Financial market participants eagerly await the GDP deflators. In the past few years, more attention has focused on the fixed weight deflator than on the implicit price deflator. An acceleration in the deflator is unfavourable news to all markets. Stock prices will decline, bond prise will fall (yields will rise), and the value of the dollar will also decrease. A moderation in the inflation measure will lead to the opposite effect.

Producer Price Index (PPI)

The PPI measures prices that manufacturers and farmers charge to the shops. Financial market attention is focused on the percentage change in the monthly finished goods PPI. However, because food prices tend to be seasonal, and energy prices are frequently volatile, analysts prefer to watch the core rate of producer price inflation, which strips out food and energy prices.

Impact on financial markets
The larger the monthly rise in the PPI, the more negative the impact on the money markets. High inflation leads to high interest rates, low inflation points to declining interest rates. Stock prices may decline and the value of the dollar will probably drop when producer price increases are large and accelerating, unless the markets expect the Federal Reserve to respond by raising interest rates, which in turn would make the dollar more attractive.

The index of industrial production

The industrial production figures are a set of index numbers that measure the monthly physical output of US factories, mines, gas and electric utilities. The financial markets tend to focus on the seasonally-adjusted monthly change in the aggregate figure.

Impact on financial markets
A rise in industrial production signals economic growth, whereas a decline in production indicates contraction. Foreign exchange professionals will look towards higher interest rates associated with economic growth, that will lead to a higher dollar.

Capacity utilization rate

Capacity utilization rate measures the extent to which the capital stock of the nation is being employed in the production of goods. Technically defined, the utilization rate for an industry is equal to the Output Index divided by the Capacity Index.

Impact on financial markets
A rise in capacity utilization has the same effect on financial markets as a rise in industrial production since the two indicators are inextricably linked.

Commodity prices

Inflationary pressures can often come from increases in commodity prices. Oil and food are closely scrutinized key commodities.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a measure of the prices of a fixed basket of consumer goods. The CPI is seasonally adjusted. Food and energy prices constitute about 25% of consumer expenditure.

Impact on financial markets
Financial market participants anxiously await the Consumer Price Index because it drives much activity in the market place. The fixed income, stock and foreign exchange markets all react adversely to sharp increases in inflation. The value of the dollar will decline in the foreign exchange market because the rise in interest rates is due to price increases, not economic expansion.

Average hourly earnings

Average hourly and weekly earnings measure the level of wages and salaries for workers on private non-farm payrolls.

Impact on financial markets
Average hourly earnings is the earliest available indicator of underlying trends in industry’s wage and salary costs and it is an indicator closely monitored by the Federal Reserve. A rapid rise in hourly wages is negative for all the markets, because it signals inflationary pressures.

The Employment Cost Index (ECI)

Wage pressures can be measured in two ways: average wages and the Employment Cost Index. Average earnings measure the level of wages and salaries for employees on non-farm payrolls. The Employment Cost Index (ECI) tracks all civilian employee compensation. Apart from wages and salaries it also includes many of the other benefits that employees receive.(paid leave, supplemental pay, insurance benefits, retirement, other benefits…)

Impact on financial markets
Financial market participants react to the ECI as they would to any other inflation measure. It is known to be watched closely by Ala Grennspan, the Chairman of the Federal Reserve, giving extra impetus should the outcome be significantly different from market expectations.

Index of Leading Indicators (LEI)

The Index of leading Indicators is a weighted average of the economic variables that lead the business cycle:

1. Average work week
   
2. Average weekly initial jobless
   
3. Manufacturers new orders for consumer goods and materials
   
4. Vendor delivery performance
   
5. Plant and equipment contracts and orders
   
6. New private sector building permits
   
7. Money supply M2
   
8. S&P 500 index of stock prices
   
9. Michigan Index of Consumer Sentiment (expected economic changes)
   
10. Yield spread (10 year Treasury bond yield minus the Fed funds rate.

Impact on financial markets
The percentage change in the Index of leading indicators is reported monthly. On the whole, the Index is a valuable and much watched forecasting device, correctly predicting a large majority of economic turning points. Large rise in the LEI will boost the dollar.

Vendor Deliveries Index

This index is diffusion index. Vendors are asked how the overall delivery performance changes compared to the prior month.

Impact on financial markets
If manufacturers are reporting prompter deliveries then this is seen as evidence of slackness in the economy, taking pressures off price increases. This is also an Index that Alan Greenspan has, at times, drawn attention to, making it at those times very market sensitive.

Michigan Index of Consumer Sentiment (ICS)

Each month, the University of Michigan conducts a representative, cross-section sampling of 700 respondent households by telephone.
List of the five questions that are asked:
1. We are interested in how people are getting along financially these days. Would you say that you and your family are better off or worse off financially than you were a year ago?
2. Now – looking ahead – do you think that a year from now you people will be financially better off or worse off or just about the same as now.
3. Now turning to business conditions in the country as a whole – do you think that during the next 12 months we’ll have good times financially or bad times or what?
4. Looking ahead, which would you say is more likely – that in the country as a whole, we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?
5. About the big things people buy for their homes – such as furniture, house furnishings, refrigerator, stove, television, and things like that – for people in general – do you think that now is a good time to buy major household items?

This Index of consumer sentiment is one of the components of the Index of Leading Economic Indicators (see above)

Conference Board Consumer Confident

The Conference board is more than 7 times larger than the ICS survey. Consumer confidence is a coincident indicator of the economy.(confidence during expansion, pessimism during recession)

Impact on financial markets
Participants in the stock market do not favour a drop in consumer confidence because it means lower corporate profits. Pessimism signals a weak economy and low interest rates, leading to a drop in the value of the dollar. An optimistic consumer is favourable in that interest rates will rise and the demand for dollars will rise, pushing up the foreign exchange value of the dollar.

National Association of Purchasing Managers Index (NAPM)

The NAPM is a composite index of five series:

1. New orders
   
2. Production
   
3. Supplier deliveries
   
4. Inventories
   
5. Employment

An Index level at 50% or more indicates that the economy as well as the manufacturing sector is expanding; an index level between 45% and 50% suggests that the manufacturing sector has stopped growing but the economy is still expanding; a level less than 45% signals a recession both in the economy and in the manufacturing sector.

Impact on financial markets
Financial market participants have anxiously anticipated the NAPM ever since Federal Reserve Chairman Alan Greenspan once claimed that he placed great emphasis on this report. As usual foreign exchange market players look forward to healthy figures.