Source: Bloomberg Market Concepts
The Primacy of GDP
GDP
- Gross Domestic Product
- Can be changed when governments change the criteria for GDP
Essential Economic Indicators
- Economic Growth
- Inflation
- Unemployment
- Business Confidence
- Housing
Economic Growth
The market value of all final goods and services produced in a country. Most comprehensive measurement of economic activity in a country.
GDP = C + I + G + (X-M)
- C = personal consumption
- I = private investment
- G = government consumption
- X = exports
- M = imports
- (X-M) = net exports
Nominal GDP is the dollar amount of GDP and does not account for inflation Real GDP growth accounts for inflation and is almost always less than nominal growth Nominal GDP Growth (%) - Inflation (%) = Real GDP Growth (%)
Recession: two successive quarters of negative GDP growth
The economy is cyclical.
2/3 of GDP is made of consumer spending
Inflation
Inflation: the general increase of prices of goods and services which decreases the purchasing power of money Leads to the rising cost of living
Two primary sources of inflation data:
- Personal Consumption Expenditures (PCE Report): measure of price changes in consumer goods and services, and what consumers are spending their income on
- Consumer Price Index (CPI): based on a representative basket of goods and services
- Needs to be representative of spending in the respective country
Unemployment
Increase in unemployment leads to less consumer spending, decreasing GDP growth. Unemployed people are likely to vote the current representatives out of office.
Nonfarm payrolls: monthly change in number of employees
Unemployment and economic decline are strongly correlated
Business confidence
Business leaders make large investments and hire people when they expect future demand.
Institute for Supply Management (ISM) has the Purchasing Management Index (PMI) which is easy to understand and is a good indicator of anticipated GDP growth
Housing
Housing starts (house building) accounts for 3% of the US economy, but is a strong indicator. Confidence of buying a mortgage, investments to a new home
Summary: The Primacy of GDP
- Real GDP growth is the main gauge of economic health.
- Economic growth is cyclical, with a series of booms and busts.
- Investors interpret the economy through economic indicators.
- Leading indicators attract the most investor interest.
Monitoring GDP
The official GDP report is not useful for traders because they guess GDP growth throughout the quarter by looking at key metrics.
Timeline of economic releases
World Economic Calendar (WECO) provides a chronological list of economic indicators that will be released after January 1st.
PMI, the business confidence indicator, is published on the first business day of every month. Survey is the analyst consensus prediction/forecast, actual is the actual value, and prior is the previous year’s value.
Change in nonfarm payrolls is published on the first Friday of every month.
Housing starts comes out in the middle of every month.
CPI (for inflation) comes out around the middle of every month as well.
GDP is released every quarter, a month after the quarter, and after all the monthly indicators have been reported for 3 months.
Since GDP is strongly correlated with other economic indicators, the monthly release of GDP numbers fails to surprise most people, as they should already have a good idea of what the performance of the economy is.
Forecasting GDP
Relevance column indicates investor interest based on volume of alerts.
Can get greater detail of estimates by right-clicking the row and selecting ECOS - Economist Estimates
The plural of anecdote is data
Economics Surprise Monitor (ECSU) shows economic indicator surprise in percentages under the Surprise Sectors section.