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Economic Indicators – What it means for you

Economic Indicators – What it means for you
Shoran Devi
August 12
11:00 2017

In this ever-evolving tech-savvy environment, we all are trying to beat the other to make the most of the dollar we have today.

This is getting increasingly difficult with the complexities of our modern day finance market and the influx of information we are being subjected to.

Making an inference from the load of mixed information is certainly a challenge to most of us.

Therefore, knowing which indicators to look out for and how to interpret that data is what differentiates a successful investor from the others.

Keeping a close watch on important economic indicators can give you an idea of where the economy is headed so you can plan your finances and even your career accordingly.

There are generally two types of market indicators – Leading Indicators and Lagging Indicators.

Leading indicators have the potential to forecast where an economy is headed to while the Lagging indicators indicate how the economy changes over time and can help identify long-term trends.

Some of the closely monitored lagging economic indicators are:

Changes in the Gross Domestic Product (GDP)

GDP is considered to be one of the most important measures of the economy’s current health. GDP measures the total value of goods and services produced within a country.

An increase in GDP portrays a strong economy.

If the country is producing more goods and services, then additional workers are employed, more services and manufacturing products are consumed, and potentially more profits are generated for shareholders.

Hence, has a positive impact on the growth potential of an economy.

GDP enables the economic watchers and central banks to determine whether the economy is contracting or expanding and whether the monetary and fiscal policy needs any realignment to ward off any potential risks such as inflation or recession.

Also, the GDP data has finer details on the output produced by individual sectors.

This is very useful for investors seeking to diversify their portfolio. Investors can potentially use these data in extrapolating how an individual sector is performing and make their investment decision accordingly.

 

Consumer Price Index (Inflation)

The Consumer Price Index (CPI) reflects the increase in cost of living or inflation and is measured by the annual percentage change in consumer prices.

A high rate of inflation erodes the purchasing power of a currency with the decline in average standard of living. Inflation also affects other factors, such as decrease in the employment rate and GDP.

The central banks uses inflation data to set interest rates. If the inflation rate is higher than the target rate for the central bank, then the central bank may increase interest rates to try to subdue it.

Conversely, if it thinks inflation is likely to be below the target rate, it may cut interest rates.

Hence, inflation is a crucial factor in determining the rates banks charge for mortgages and the rates they offer on savings accounts.

This in turn affects the consumption pattern and assists the investors in making relevant investment decisions.

 

Unemployment Rate

Unemployment Rate measures the number of people looking for work as a percentage of the total labour force.

Unemployed workforce reflects the loss of wages and loss of contribution to the economy in terms of the goods or services that could have been produced and so depicts the under-utilization of the labour capacity. Unemployment Rate has ripple effect in the economy and is highly sought data for developed economies.

Principally, more people with jobs represents higher economic output, retail sales, savings and corporate profits.

A stable Unemployment Rate does not put undue pressure on inflation—upward or downward, the very kind of certainty an astute investor seeks.

Income and Wages

If the economy is operating efficiently, wage earnings would increase regularly to keep up with the average cost of living.

When wages or income drops, however, it is a sign that employers are either cutting pay rates, laying workers off, or reducing their hours.

Declining income can also reflect an environment where investments are not performing. Hence, a crucial information to investors when making investment decision.

Some of the important leading economic indicators which moves markets and hence are closely monitored by financial market participants are:

 

Manufacturing Activity

Manufacturing Activity is a strong indicator of the state of the economy. This is mainly because Manufacturing Activity has a direct relation to the Gross Domestic Product (GDP) of an economy. If the Manufacturing Activities increase, it suggests strong demand for consumer goods and hence reflects a healthy economy.

Since manufacturing require labour force as well, an increase in Manufacturing Activity indicates possible increase of employment and probably at better wage rates.

 

Retail Sales

Retail Sales data are read together with the Manufacturing Activity and Inventory Level data. Being a component of GDP, any growth in Retail Sales directly increases GDP.

When a company’s sales increases, they can hire more employees to sell or produce more goods which in turn increases employment and hence income levels. In general, an increase in Retail Sales indicates an improving economy.

 

Inventory Levels

Similar to Retail Sales, Inventory Levels are also read with Manufacturing Activities data. A high reading of Inventory Levels may determine two possible scenarios – either there is fall in consumer demand for the goods or the demand for the goods are expected to increase.

If the demand for consumer goods are falling, the Inventory Levels would start to build up and may reflect a contracting economy. In the second possible reasoning, an increase in Inventory Level may indicate that businesses are purposely building up on their stock piles to cater for an expected surge in consumer demands.

If the consumer demand increases as expected then business with adequate stock piles can meet the demand and thereby increase their profit. This is usually measured by an important indicator known as the Business Confidence Index.

 

Building Permits

Building Permit data are widely used as a direct measure of construction industry.

The housing market is generally seen as one of the first economic sectors to rise or fall when economic conditions improve or worsen, and housing permits and starts can be early indicators of activity in the housing market.

An increase in housing starts can have a ripple effect through the economy such as creating more jobs in the construction sector or increased demand for products that these home buyers will need such as household appliances.

Therefore, generally an increase in these data would reflect strong consumer confidence and hence improving economy.

Businesses, investors, policy makers, Government closely monitor these key indicators to gauge how the economy is performing. NGO’s and donor agencies also follow such data as it has implications on their work.

In Fiji, the Fiji Bureau of Statistics and the Reserve Bank of Fiji are the two agencies that provide such data for the consumption of general public.

However, it is important to note that such key indicators must not be seen in isolation.

As an active investor, it is important to employ these economic and financial indicators in your investment model, however, the need to exercise good judgement cannot be stressed enough when making any investment decision.

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