Important Economic Indicators for the United States
By: Kathy Lien
The following is an excerpt from Kathy Lien's Day Trading the Currency Market
All of the following economic indicators ware important for the US Dollar. However, since the US economy is service oriented, it is important to pay particular attention to numbers for the service sector.
Employment-Nonfarm Payrolls – The employment report is the most important and widely watched indicator on the economic calendar. Its importance is mostly due to political influences rather than pure economic reasons; as the Fed is under strict pressure to keep unemployment under control. As a result, interest rate policy is directly influenced by employment conditions. The monthly report consists of data from two different surveys, the Establishment Survey and the Household Survey. The Establishment Survey takes data from nonfarm payroll employment, average hourly workweek, and the aggregate hours index. The Household Survey gives information on the labor force, household employment, and the unemployment rate. Currency traders tend to focus on seasonally adjusted monthly unemployment rates and any meaningful changes in nonfarm payrolls.
Consumer Price Index – The consumer price index (CPI) is a key gauge of inflation. The index measures the prices on a fixed basket of consumer goods. Economists tend to focus more on the CPI-U or the core inflation rate, which excludes the volatile food and energy components. The indicator is widely watched by the FX markets, as it drives a lot of activity.
Producer Price Index – The producer price index (PPI) is a family of indexes that measures average changes in selling prices received by domestic producers for their output. The PPI tracks changes in prices for nearly every goods-producing industry in the domestic economy, including agriculture, electricity and natural gas, forestry, fisheries, manufacturing, and mining. Foreign exchange markets tend to focus on seasonally adjusted finished goods PPI, and how the index has reacted on a monthly, quarterly, and annualized basis.
Gross Domestic Product – Gross domestic product (GDP) is a measure of the total production and consumption of goods and services in the United States. The Bureau of Economic Analysis (BEA) constructs two complimentary measures of GDP, one based on income and one based on expenditures. The advance release of GDP, which occurs the month after each quarter ends, contains some BEA estimates for data not yet released, inventories, and trade balance, and is the most important release. Other releases of GDP are typically not very significant unless a major revision is made.
International Trade – The balance of trade represents the difference between exports and imports of foreign trade in goods and services. Merchandise data are provided for US total foreign trade with all countries, detail for trade with specific countries and regions of the world, as well as for individual commodities. Traders tend to focus on seasonally adjusted trade numbers over three-month periods, as single-month trade periods are regarded as unreliable.
Employment Cost Index – The employment cost index (ECI) data is based on a survey of employer payrolls in the third month of the quarter for the pay period ending on the 12th day of the month. The survey is a probability sample of approximately 3,600 private industry employers and 700 state and local governments, public schools, and public hospitals. The big advantage of the ECI is that it includes non-wage costs, which adds as much as 30 percent to total labor costs. Reaction to the ECI is often muted as it is generally very stable. It should be noted, however, that it is a favorite indicator of the Fed.
Institute for Supply Management (formerly NAPM) – The Institute for Supply Management (ISM) releases a monthly composite index based on surveys of 300 purchasing managers nationwide representing 20 different industries regarding manufacturing activity. Index values above 50 indicate an expanding economy, while values below 50 are indicative of contraction. This number is widely watched and used by the Fed.
Industrial Production – The Index of Industrial Production is a set of indexes that measures the monthly physical output of US factories, mines, and utilities. The index is broken down by industry type and market type. Foreign exchange markets focus mostly on the seasonally adjusted monthly change in aggregate figure. Increases in the index are typically dollar positive.
Consumer Confidence – The Consumer Confidence Survey measures the level of confidence individual households have in the performance of the economy. Survey questionnaires are sent out to a nationwide representative sample of 5,000 households, of which approximately 3,500 respond. Households are asked five questions: (1) a rating of business conditions in the household’s area, (2) a rating of business conditions in six months, (3) job availability in the area, (4) job availability in six months, and (5) family income in six months. Responses are seasonally adjusted and an index is constructed for each response; then a composite index is fashioned based on the aggregate responses. Market participants perceive rising consumer confidence as a precursor to higher consumer spending. Higher consumer spending is often seen as a spark that accelerates inflation.
Retail Sales – The Retail Sales Index measures the total goods sold by a sampling of retail stores over the course of a month. This index is used as a gauge of consumer consumption and consumer confidence. The most important number is typically ex-autos, as auto sales can vary from month to month. Retail sales can be quite volatile due to seasonality; however, the index is an important indicator of the general health of the economy.
Treasury International Capital Flow Data (TIC Data) – The Treasury international capital flow data measures the amount of capital inflow into the United States on a monthly basis. This economic release has become increasingly important over the years. Aside from the headline number itself, the market also pays close attention to the official flows, which represent the demand for US government debt by foreign central banks.