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Economic Indicators Every Trader Should Know

26 May 2015 in Investing 101

When reading the news or listening to commentary on the markets, chances are you’ve heard people mention market-moving indicators such as jobless claims and new home sales. While those individual data points may not pique your interest if you aren’t looking for a job or don’t own a home, it’s worth getting interested in how market indicators can affect your investments and economic growth in order to anticipate how our economy could grow in 2015 and beyond.

There are numerous market-moving indicators to keep track of, some more relevant than others, depending on the stock you own. Let’s take a look at a few key indicators that you may want to be familiar with. They are impactful resources and data points to reference when making investment decisions.

THE RISE AND FALL OF JOBLESS CLAIMS

During the financial crisis, many people anxiously clung to their jobs while many others had to cope with the difficult challenges of unemployment. Each week, the US Department of Labor issues a report on the number of initial jobless claims. The reports indicate how many people filed for unemployment benefits for the first time in the week prior.

During the peak of the financial crisis in March 2009, roughly 670,000 people filed for unemployment benefits a week, which was more than double the average of 321,000 jobless claims in 2007.1 How are the rates doing now? They are looking a lot better at around 282,000 and could be a sign that more economic growth is on the horizon.2 Take a look at how employment has risen since the financial crisis in the chart below.

Economic-Indicators-US_Labor_Force_and_Employment_Numbers_-_v1

Source: Wikipedia, FRED

Consumer spending supports economic growth. People typically need jobs in order to have the means to spend and spending, through increased demand, can help create more jobs in the process. Thus, being aware of how our nation’s jobless claims are rising, falling, or plateauing can help you anticipate where the economy and the markets could be headed. Therefore helping you make smarter trading decisions.

To help put the relationship between employment and consumption into perspective, US consumers were the driving force behind roughly 71% of US GDP in and 15% of World GDP in 2012. Shoppers are not only supporting the retailers they buy from, but also the employees at those stores, the distributors, and the manufacturers. Although the pace of consumer spending as a percentage of GDP is anticipated to slow, the Bureau of Labor Statistics projects that consumer spending could grow 2.6% annually over the next eight years with 63.2% of US jobs estimated to be related to consumption in 2022.3

Economic-Indicators-consumption-and-employement-graph

Source: BLS

Some of the motifs in our catalog that are related to consumer spending include Emerging Markets Consumer, Vanity Flair, and Hot Retail. Explore more of our consumer related motifs here.

HOUSINGS RIPPLE EFFECT

Are you a homeowner or interested in trading REITs or property related companies? Before investing in real estate or other affiliated industries such as home appliances and furnishings, familiarize yourself with economic indicators such as housing starts, new home sales, and existing home sales.

Each month, the US Census Bureau in conjunction with the Department of Housing and Urban Development (HUD) releases housing reports on the number of building permits issued, new houses beginning construction, and new residential sales. The National Association of Realtors (NAR) issues another important monthly report on the number of existing home sales.

Why might the findings in these reports matter to investors like you? The results can have a ripple effect on the economy! For example, new housing starts generally indicate home builders are confident they will be able to build and sell for a profit. Otherwise why would they bother taking on so many risks?

Second, new jobs are created for the workers that construct the homes. Third, the workers, homebuilders, and new owners are likely to increase their consumer spending as a result of the new house. After all, buyers of both new and existing homes typically buy things like furniture, appliances, housewares, and landscaping supplies. Plus, it takes having confidence and the financial means to buy a home.

Curious what is predicted in the housing market for 2015? Take a look at the below infographic by NAR and explore these housing related motifs: Housing Recovery, Home Improvement, and Renter Nation.

Economic-Indicators-infographic-research-2015-housing-expectations-2015-01-07-729x1024

Source: NAR

How confident are you and other consumers?

With more than 66% of the US economy driven by consumption, it’s important to be aware of consumer confidence when investing.4 Even if you’re feeling bullish about the economy, keep in mind your feelings may be quite different from the sentiments of most other Americans.

The Conference Board has been producing The Consumer Confidence Index (CCI) since 1967, gathering insightful opinions from roughly 5,000 US households on the below topics:5

• Current business conditions

• Business conditions for the next six months

• Current employment conditions

• Employment conditions for the next six months

• Total family income for the next six months

If consumers are feeling confident, consumer spending may rise and businesses can become more profitable. Many sectors can be affected by consumer confidence including retail, luxury goods, manufacturing, and banks.6

Here are a few motifs that may interest you after reviewing the CCI: Hot Retail, Growth At a Reasonable Pace (GARP), and Higher Highs.

Are you watching out for inflation?

Since 1919, The Bureau of Labor Statistics has been measuring the US Consumer Price Index (CPI) every month to measure inflation. In February of this year, the Bureau recently made significant redesigns to their estimation system for the first time in 25 years. Now it is more flexible, eliminates the use of paper, and also has added review functionalities.7

Perhaps they are trying to regain favor of The Fed, which has preferred to reference the Bureau of Economic Analysis’s Personal Consumption Expenditures Price Index (PCE) in recent years.8

Although the Federal Reserve is tasked with aiding price stability and economy growth, if the government’s fiscal and monetary policies are not well maintained, issues of inflation or deflation could arise. If the cost of living becomes too high for households, consumer spending tends to decrease, reducing business profitability and slowing growth in the economy. Rising costs of resources impact businesses and consumers’ purchasing power.

Investors should watch out for inflation because higher production costs can cause companies to increase prices of their products and services. Consumers may cut back on spending as a result and profitability could stagnate or decrease. Growth stocks also tend to be hit more than value stocks during periods of inflation and rising interest rates because they tend to have low amounts of cash up front.9 Sectors that are sensitive to inflation include consumer staples, utilities, and financials.10

Take a look at the charts below showing the US 10 Year Yield and the Fed Funds Rate.

Economic-Indicators-US10Y

Source: CNBC, US 10 Year Yield

Economic-Indicators-Fed-Funds-Rate

Source: Bloomberg, Fed Funds Rate

Some economists, such as Bill Conerly, predict that interest rates could rise in 2015-2016 and beyond as seen in the chart below.

Economic-Indicators-Interest-Rate-Forecast-2015-2016

Source: Forbes

A few motifs you may want to explore as you monitor the indices, yields, and rates are Inflation, Rising Interest Rates, and Rising Food Prices.

Make educated trading decisions

Before placing trades, it’s good practice to review market-moving indicators such as jobless claims, housing starts and sales, consumer confidence, and inflation. After all, the growth or decline of your city could be vastly different from what’s happening at a national level. Encompassing economic factors into your trading decisions can help you make smarter investments and grow your wealth.

Open an account with Motif Investing today and discover a new way to invest. All you need is a concept, theme, or idea to get started on the path toward your financial goals.

1USA Today, http://www.usatoday.com/story/money/business/2013/09/14/impact-on-states-of-2008-financial-crisis/2812691/

2New York Times, http://www.nytimes.com/2015/03/27/business/fewer-us-jobless-claims-suggest-a-rebounding-economy.html?_r=0

3BLS, http://www.bls.gov/opub/mlr/2014/article/consumer-spending-and-us-employment-from-the-recession-through-2022.htm#_edn2

4Reuters, http://www.reuters.com/article/2015/03/31/us-usa-economy-confidence-idUSKBN0MR1QH20150331

5Wikipedia, http://en.wikipedia.org/wiki/Consumer_confidence

6Wikipedia, http://en.wikipedia.org/wiki/Consumer_confidence

7BLS, http://www.bls.gov/cpi/cpinewest.htm

8Wikipedia, http://en.wikipedia.org/wiki/Consumer_confidence

9Investopedia, http://www.investopedia.com/articles/investing/052913/inflations-impact-stock-returns.asp

10WSJ, http://www.wsj.com/articles/SB10001424052748704775604576120591083072026

  1. 28 May at 12:28 am

    I don’t pay so much attention to economic indicators but they do provide a big picture.

    I think those who are interested in economic indicators should take a look at

    The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities

    by Bernard Baumoh (http://amzn.to/1QbIDUj).

    The book is a good starting point to learn about economic indicators as it gives a concise explanation for various indicators.

    Finally, unless you are a good investor or have high risk tolerance than you should not invest in highly cyclical companies because the highs and lows will really be a wild ride.

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