Economic indicators that help predict market trends

Economists usually group macroeconomic statistics into one of three headings-leading, lagging, or synchronized. In figurative terms, people observe them through windshields, rearview mirrors or side windows.

Synchronous and lagging indicators provide investors with some confirmation of the current state of the market and the past, and are a good starting point because they help indicate where the economy may be headed.

Market index

In order for an economic indicator to have predictive value to investors, it must be current, it must be forward-looking, and it must be discounted to its current value based on future expectations. Meaningful statistics on the direction of the economy start with the main market indexes and the information they provide:

Although these measures are critical to investors, they are not generally regarded as economic indicators itself. This is because they don’t look to the future—a few weeks or months at most. Drawing historical charts of indexes over time puts them in context and gives them meaning. For example, knowing that it takes 2 US dollars to buy 1 pound sterling is not very useful, but it may be useful to know that the pound to dollar exchange rate is at a five-year high.

Leading economic indicators predict market trends

Indicative weekly data report

This Unemployment Insurance Weekly Claim Report It is a weekly report issued by the Department of Labor. In the case of a weak economy, unemployment applications will show an upward trend. They are usually analyzed as a 4-week moving average (MA) to smooth out weekly differences.However, this report has an inherent bias that self-employed persons, part-timers and contract workers who have lost their jobs are not eligible for benefits and therefore are not counted.

The money supply is an abstract technical calculation issued by the Federal Reserve on the amount of liquidity in the economy. However, in a digital world where large amounts of money can be transferred instantly across the globe, this indicator has lost most of its importance in the past decade.

Indicative monthly data report

This New home construction every month The report commonly referred to as “housing starts” is a report issued by the Census Bureau and the Department of Housing and Urban Development (HUD). The report lists the building permits issued, the start and completion of the house. This is an important leading indicator because construction activity tends to pick up early in the expansion phase of the business cycle.

This Existing Home Sales The press release is issued by the National Association of Realtors.The housing start report focuses on supply, while this report focuses on demand. The two jointly assess the overall health of the housing sector. Due to the long time involved in completing the house sale, the data contained in this report is usually two months ago. It can be used to predict consumer spending and is directly affected by factors such as mortgage interest rates and real estate business seasonality.

The Consumer Confidence Index (CCI) is published by the American Chamber of Commerce and is one of the few reports that measure the views and attitudes of respondents.It is inaccurate and imprecise, but it is unexpectedly accurate in predicting consumer spending, which accounts for about 68% of the economy.

Other important instructions report

This Manufacturing Business Outlook Survey Released by the Federal Reserve Bank of Philadelphia and surveyed purchasing managers of 5,000 manufacturing companies in Pennsylvania, Delaware, and New Jersey, collecting “better”, “same” or “worse” readings for a series of indicators.Its limitations—small sample size, limited geographic location, and manufacturing focus—do not prevent it from accurately measuring its previous Key Purchasing Managers Index (PMI) report. Part of the month-to-month difference in readings is due to the small sample size.

PMI is issued by the Supply Management Association (formerly known as the National Association of Purchasing Managers).Although the sample size is small and focused on manufacturing, Wall Street pays close attention to it due to its historical reliability in forecasting gross domestic product (GDP) growth.

Estimated long-term mutual fund flow It is a measure released every month by the Association of Investment Companies.This indicator summarizes the net flow of stocks, bonds, and money market mutual funds, but it is largely ignored due to a variety of reasons, including the omission of individual stock transactions in this report and no distinction between system investments (ie 401(k) contributions) ) And market timing action. It is also an inverse indicator, because many individual investors’ reaction to the event is actually buying high and selling low. The flow of money in the money market is separately reported by the Federal Reserve.

Industry and Manufacturing Report

This Monthly reports on shipments, inventory, and orders of durable goods manufacturers, Commonly called the Durable Goods Report (DGR), issued by the Census Bureau.As a barometer of the health of heavy industry, it surveyed commodity manufacturers with life expectancies of more than three years. Such purchases by companies mean capacity expansion, and retail sales indicate increased consumer confidence. High monthly volatility requires the use of moving averages and year-on-year comparisons to determine the pivot in the economy.

This Factory order report Also from the Census Bureau; it is more detailed and less timely than DGR. Its main disadvantage is that it does not take into account that both inflation and deflation will greatly affect inventory price changes. The report contains data from two months before its release, making it another “leading” indicator.

Beige Book

“Beige Book” (officially called Summary of Fed’s comments on current economic conditions) Published by the Federal Reserve eight times a year.It includes a collection of discussions from each of the 12 Fed districts and a summary statement, all of which are presented in a noncommittal and restrained tone and are called “Federal Statements.” Analysts and investors try to understand the meaning of the report, just like reading tea. The report foreshadows the actions of the Federal Open Market Committee (FOMC) at its next meeting, even though the bond market predicts these actions through almost foolproof statistical indicators.

Bottom line

Leading economic indicators can allow investors to understand the future economic development direction and pave the way for investment strategies suitable for future market conditions. Leading indicators are designed to predict economic changes, but they are not always accurate, so reports should be considered comprehensively, because each report has its own flaws and shortcomings.


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