Investors, traders and economists are always looking for signs where the economy is heading. Economic activity affects interest rates in two ways. A growing economy tends to create new demand for borrowing, pushing up interest rates. Conversely, a slowing economy drives down demand for money, pushing down rates. Furthermore, the level of economic activity tends to influence the actions of the Federal Reserve, which in turn will also impact interest rates.
The market can react in strange ways to the release of economic indicators.
On the surface what appears to be a “good number” which indicates the economy is growing at a healthy pace, can send interest rates lower (when common sense suggests the opposite should occur). The reason why is that what the market is expecting the number to be, and how close the number is to what the market is expecting, is more important than the number itself.
As there literally hundreds of economic indicators to follow, it can be overwhelming and confusing for the individual investor. By following a few of the most important economic indicators and their trends however the individual investor can have a very good pulse on what is happening in the economy and how the market is likely to react.
Here is a great list of economic indicators to start following
Gross Domestic Product (GDP)
Released by the Bureau of Economic Analysis, the GDP is the single most important indicator. It is a measure of the total output of services and goods generated by property and labour located in the US. High GDP growth is considered an inflation risk and may spur the Fed to raise interest rates to prevent ‘overheating’. Slow or negative growth will call for reduction in interest rates to stimulate the country’s economy. GDP is released once a quarter with an advance release (which may later be amended) 4 weeks after the quarter ends and a final release 3 months after the quarter ends. You can find the schedule for GDP releases here.
Consumer Price Index (CPI)
The CPI is published by the Bureau of Labour Statistics. It is a measure of the change over a fixed time-frame of the price of a basket of products as paid for by urban-dwelling consumers. It is one of the most significant measures of inflation. A high CPI points to rising inflation and will compel the Fed to push for higher interest rates. CPI is released once a month around the 16th of the month. You can find the schedule for CPI releases here.
Published by the Bureau of Labour Statistics, the Unemployment Rate is a measure of the overall unemployment rate as well as a breakdown by industry, occupation, reason for unemployment and duration of unemployment. Consistently low unemployment is considered an inflation risk and the Fed may move to raise interest rates. High unemployment on the other hand may compel a reduction of interest rates. Released on the first Friday of the month for the previous month, you can find a schedule with Employment situation release dates here.
Housing Starts and Building Permits
Published by the Department of Commerce, this is a statistic of the number of private housing units on which construction has commenced and the number of construction permits issued over a given month. The property market is a one of the key pointers of where the economy is headed – robust property construction is usually a sign of economic growth. The Fed may choose to increase interest rates to prevent inflation and potential housing bubble. You can find the release schedules for housing starts and building permits here.
The Beige Book
A report from the Federal Reserve’s FOMC that details the prevailing economic conditions from the jurisdictions of the 12 district Federal Reserve banks. Whereas the Beige Book is essentially a backward-looking publication, its content can provide hints on the future direction the FOMC is likely to take. You can find the release schedule for The Beige Book here.