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Defining Economic Indicators

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Defining Economic Indicators Powered By Docstoc
					Economic Indicators
Disclaimer

  TD Direct Investing does not provide advice.

  This seminar is intended for educational purposes only and as such
  is not a solicitation or recommendation to make an investment based
  on the contents of this presentation.

  Investors should be aware that investments can fall as well as rise
  and you may not get back all the funds that you

  have invested and if there is any doubt over the suitability of a
  particular investment then you should seek independent advice.

  Tax treatment depends on the individual circumstances of each client
  and may be subject to change in the future.
Contents

   What is an Economic Indicator?

   Defining Economic Indicators

   Revisions

   GDP

   Employment

   Inflation

   CDS Rates

   Housing data

   Novelty Indicators

   How to use indicators
What is an economic indicator?

 “An Economic Indicator is a piece of economic data,
 usually of macroeconomic scale, that is used by
 investors to interpret current or future investment
 possibilities and judge the overall health of any
 economy”

 Source: www.investopedia.com
What is an economic indicator?

 Economic indicators can be split into three categories:

 Leading

 Lagging

 Coincident



 Due to the nature of economic reporting the vast
 majority of indicators will be lagging to some extent.
Defining Economic Indicators
 Leading Indicators are popular because they give the
 earliest warnings about an economy due to change
 from boom to bust (or vice versa).

 However, leading indicators can be less reliable than
 other indicators. For example, the US organisation
 known as The Conference Board runs an index which
 has correctly predicted every recession since it
 started, but has also produced some false signals.

 This led economist Paul Samuelson to joke
 “Economists have correctly predicted nine of the last
 five recessions”.
Defining Economic Indicators
Examples of Leading Indicators:

 Money   Supply Figures

 CBIquarterly survey of business confidence
 (Industrial Trends Survey)

 Monthly   mortgage approvals figure

 Stock   market movements
Defining Economic Indicators
 Lagging indicators use information from the recent
 past to make predictions. As a general rule, the
 longer the lag, the more accurate the indicator will be
 (as it is based on a larger quantity of information).
 However, an indicator that lags too much could be
 useless for quick-moving cycles, and using lagging
 indicators exclusively means it is unlikely an investor
 will “catch the bottom of the market”.
Defining Economic Indicators
Examples of lagging indicators:

   Unemployment rates (Office of National Statistics quarterly figures, US
    non-farm payrolls)

   Bank of England Inflation report and Monetary Policy Committee
    meeting minutes

   RPI and CPI inflation rates (ONS monthly figures)

   Council of Mortgage Lenders’ Mortgage Lending figure

   CML House price approvals

   Rightmove/Halifax House prices

   Public Sector Net Cash Requirement (PSNCR) and Average Earnings
Defining Economic Indicators

 Coincident indicators are those giving information
 about the current state of the economy. Because of
 delays in aggregating and formatting data it is often
 very difficult to get useful coincident data.

 An example of coincident data might be daily sales
 figures for a department store, or an announcement of
 a wave of hirings or redundancies.
Revisions of Economic Data

It is not uncommon for economic data to be revised
after its initial release. Any revisions are usually
outlined in the next regular release e.g. monthly house
prices may be revised 1 month later.
GDP Figures
 GDP is the value of the output of goods and services produced
 within a country (irrespective of whether or not the business is
 foreign owned). When the media speak of the term “economic
 growth” for a country (usually in per cent) they are usually
 referring to GDP growth.

 In the UK GDP data is released on a quarterly basis, seven
 weeks after the end of the quarter i.e. Q1’s data was published
 towards the end of May.

 However, as shown on the next slide the UK’s share of global
 GDP is very small compared to other countries, so figures from
 other countries can be as important or even more important.
National GDP as share of world GDP (Source: CIA World Factbook
2010-11)
                                            USA

                                            China

                                            Japan

                                            Germany

                                            France

                                            Brazil

                                            UK

                                            Italy

                                            Russia

                                            India

                                            Canada

                                            Spain

                                            Australia

                                            Rest of World combined
Employment figures

American non-farm payroll figures are issued by the
Bureau of Labor Statistics at 1.30pm (UK time) on the first
Friday of each month. This figure shows the number of
jobs created or lost overall in the economy excluding the
following:

      General government employees
      Private household employees
      Employees of nonprofit organisations that provide
      assistance to individuals
      Farm employees (farms hire and fire seasonally
      which would distort the figures)
Employment figures
The American non-farm payroll figures are often seen as the
single most important economic indicator. This is because the
US remains by far the largest economy in the world, and so a rise
in unemployment indicates a worsening economic situation for
the entire world.



In addition to employment figures the full report (available at
www.bls.gov) contains data on which sectors are hiring and firing
as well as changes in average hourly earnings.
Inflation figures
 The Bank of England defines inflation as “a general rise in prices
 across the economy”. The Bank generally quotes two inflation
 measures: Retail Price Index (or RPI, which monitors prices of
 rents and mortgage payments) and Consumer Price Index (or
 CPI, which ignores these).



 In an inflationary environment some assets will perform
 exceptionally well while others will stagnate. As the real value of
 an investor’s profits may well be hit by a declining currency, it
 becomes very important to select the right investments.
Inflation measurements
Different countries use different measures for inflation and some
countries have a higher tolerance for inflation than others. As of
October 2011 the highest inflation rate in the world belongs to
Uganda which has a rate of 30.5 per cent*.

Inflation seems at first glance to have no net effect on an
economy and economists have observed an inverse relationship
(the Phillips curve) between inflation rates and unemployment -
suggesting high inflation is desirable. However, because of the
uneven distribution of inflation’s positive and negative effects
most governments will act to reduce excessive inflation by raising
the central bank interest rate (reducing the growth in the money
supply).
House prices and mortgage
lending
 Although property and equities are to some extent competing
 investment classes, both are more likely to perform well in an
 environment of increasing credit availability. Furthermore, rising
 house prices have been shown by the National Bureau of
 Economic Research to create a “wealth effect” where people’s
 un-crystallised gains encourage them to consume more.

 The level of mortgage lending appears to be closely linked to
 house prices, as without new mortgage lending the demand for
 property tends to fall.

 Information on prices and mortgage lending is released by
 Rightmove, Halifax, the Council of Mortgage Lenders and the
 Royal Institute of Chartered Surveyors.
Novelty Indicators
 These are mainly issued for humorous purposes but
 might be useful for timing market moves.

 Examples include:

 Hemline index (theory that women’s skirts are longer
 in a recession)

 Big Mac Index (a measure of purchasing power parity
 in different countries in a more simple form than a list
 of exchange rates)

 CocktailParty Index (assessing position in the
 economic cycle based on reaction a banker receives
 at a cocktail party or other social event)
How to use economic indicators

 Before a given indicator comes out it can also be useful to have
 details of the expected result. This is because you will then know
 how good or bad the figure is compared to the expectation which
 should theoretically be built into current prices. If more than one
 prediction is made it is sometimes possible to get a consensus
 forecast.

 Different indicators are important to different types of investment
 (e.g. inflation expectations are extremely important to bond
 holders, whereas the unemployment rate is more important to
 retail shares). You can get an idea of what indicators are
 important by reading documents like analyst reports and
 company statements.
Questions?
If you have any questions please feel free to attend any of our
other seminars or book a free personal appointment with one of
our Investor Centre Representatives

TD Direct Investing Investor Centre

71 High Holborn

London

WC1V 6TD

Tel: 0845 601 6205
Disclaimer

  TD Direct Investing does not provide advice.

  This seminar is intended for educational purposes only and as such
  is not a solicitation or recommendation to make an investment based
  on the contents of this presentation.

  Investors should be aware that investments can fall as well as rise
  and you may not get back all the funds that you

  have invested and if there is any doubt over the suitability of a
  particular investment then you should seek independent advice.

  Tax treatment depends on the individual circumstances of each client
  and may be subject to change in the future.

				
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posted:10/20/2012
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