Economic indicators that help predict market trends

Ekonomer grupperar vanligtvis makroekonomisk statistik under en av tre rubriker - ledande, släpande eller sammanfallande. Figurativt sett ser man dem genom vindrutan, bakspegeln eller sidofönstret. De är emellertid alla ekonomiska indikatorer som hjälper till att förutsäga marknadstrender.

Economists usually group macroeconomic statistics under one of three headings – leading, lagging or coincident. Figuratively speaking, you can see them through the windshield, rearview mirror or side window. However, they are all economic indicators that help predict market trends.

Cohesive and lagging indicators give investors some confirmation of where the market is and where it has been, and are a good place to start as they help indicate where the economy might be heading.

Market index

For an economic indicator to have predictive value for investors, it must be timely, it must be forward-looking and it must discount current values according to future expectations. Meaningful statistics on the direction of the economy start with the major market indices and the information they provide:

Stock markets

Bond and mortgage rates and the yield curve

Exchange rates

Commodity prices, especially gold, grains, oil and metals

While these measures are crucial for investors, they are not generally considered economic indicators per se. This is because they do not look very far into the future – a few weeks or months at most. Mapping the history of indices over time puts them in context and gives them meaning. For example, it’s not terribly useful to know that it costs $2 to buy a British pound, but it might be useful to know that the pound is trading at a five-year high against the dollar.

Indicative weekly reports

The Unemployment Insurance Report is a report released weekly by the Department of Labor. In a weakening economy, unemployment claims will trend upwards. They are generally analyzed as a four-week moving average (MA) to compare week-to-week variance.1 However, this report has a built-in bias in that self-employed, part-time and contract workers who lose their jobs do not qualify for benefits and are therefore not counted.

Money supply, which is an abstract technical calculation of how much money is churning in the economy is released by the Federal Reserve. But in a digital world where huge sums can be transferred across the world in an instant, this indicator has lost much of its importance over the past decade.

Indicative monthly reports

The monthly new housing report often referred to as “housing starts” is a report released by the Census Bureau and the Department of Housing and Urban Development (HUD). This report breaks out building permits issued, housing starts and completions. This is an important leading indicator in that construction activity tends to pick up early in the expansion phase of the cycle.

News release on existing home sales released by the National Association of Realtors. While housing starts focuses on supply, this report focuses on demand. Together, both assess the overall health of the housing sector. The data in this report are usually two months old, depending on the time required to close the home sale. It is useful for predicting consumption expenditure and is directly influenced by factors such as mortgage rates and the seasonal nature of the real estate industry.

The Consumer Confidence Index (CCI) is released by the Conference Board and is one of a handful of reports that measure respondents’ perceptions and attitudes. It is inexact and imprecise, but surprisingly accurate when it comes to projecting consumer spending, which accounts for around 68% of the economy.

Other key indicator reports

Released by the Philadelphia Fed, the Manufacturing Business Outlook survey polls purchasing managers at 5,000 manufacturing firms in Pennsylvania, Delaware, and New Jersey and collects “better,” “same,” or “worse” readings on a variety of measures. Its limitations -a small sample size, limited geography and a manufacturing focus – do not prevent it from accurately measuring the key purchasing managers’ index (PMI) it precedes. The month-to-month variance in the readings is partly due to the small sample size.

The PMI is released by the Institute for Supply Management, formerly the National Association of Purchasing Managers. Despite its small sample size and focus on manufacturing, Wall Street follows it closely given its historical reliability in predicting gross domestic product (GDP) growth.
Estimated long-term fund flows is a measure issued monthly by the Investment Company Institute. This indicator aggregates net flows for equity, bond and money market funds, but it is largely ignored for several reasons, including that this report omits individual stock purchases and sales, and does not distinguish between systematic investments (i.e. 401(k) contributions) and market timing measures. It is also a contra-indicator in that many individual investors react to events by buying high and selling low. Money market fund flows are reported separately by the Federal Reserve.

Industrial and manufacturing reports

The monthly report on durable goods manufacturing and inventories, orders, and purchase orders, commonly known as the durable goods inventory report (DGR), is released by the Census Bureau. As a barometer of the health of the heavy industry, it surveys manufacturers of goods with a lifespan of more than three years. Such purchases by businesses mean capacity expansion and retail sales indicate increased consumer confidence. High month-to-month volatility requires the use of moving averages and year-to-year comparisons to identify turning points in the economy.

The Factory Orders Report also comes from the Census Bureau; it is more detailed and less timely than the DGR. Its main shortcoming is that it does not take into account price changes that can significantly affect stocks during both inflationary and deflationary periods. The report includes data for the two months prior to the launch, making it another “leading from behind” indicator.

The Beige Book

The “Beige Book” (officially the summary of the comments on the Federal Reserve’s current economic conditions) is released eight times a year by the Federal Reserve.14 It contains a collection of discussions from each of the 12 Fed districts, along with a summary statement, all presented in the non-committal, measured tones known as “Fed Speak.”

Analysts and investors try to appreciate the meaning of the report, much like reading tea leaves. The report previews action for the Federal Open Market Committee (FOMC) at the following meeting, although the bond market anticipates this action with a statistical measure that is virtually foolproof.

The points

Leading economic indicators can give investors a sense of where the economy is heading in the future and pave the way for an investment strategy that fits future market conditions. Leading indicators are designed to predict changes in the economy, but they are not always accurate so reports should be considered in aggregate, as each has its own shortcomings and flaws.

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