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Economic Indicators – What It Means For You

Economic Indicators – What It Means For You
May 12
11:05 2018

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) (GDP)

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 underutilization 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 nanufacturing 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.

Feedback: maraia.vula@fijisun.com.fj

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