Market Moving Economic Data Reports from United States

Now we get down to the nitty-gritty data. I will run you through the major economic data reports that come out of the United States. My intention here is not necessarily to magnify the importance of U.S. economic data, even though the United States is the world’s largest national economy and the U.S. dollar is on one side of 80 percent of currency trades.

Nope, my aim here is to kill two birds with one stone:

• Introduce you to the major economic reports issued by every major currency country, using U.S. data as the example

• Let you in on the finer points of how the market views the important  data reports

Later in my coming post I will take you through a country-by-country look at major non-U.S. data reports that don’t fall into the main report categories or are too important to be ignored.

Labor Market Reports

I put the job market at the top of our economic model, and the various labor-market reports are what we use to keep tabs on the job market. The monthly U.S. employment report, the highlight of which is the non-farm payrolls (NFP) report, gets the most attention. Non-farm Fridays, as they’re semi-affectionately known, are among the most volatile trading days each month.

Non-farm payroll report (Relevance: High)

The NFP report, also referred to as the establishment survey (because it's based on responses from companies), is the government’s primary report assessing the overall labor market in the prior month. Here are the main components of the report:

• Change in non-farm payrolls: This is the big number everyone focuses on. If you see NFP estimates of +125,000, it means the consensus forecast is that the economy added 125,000 new jobs in the previous month. The NFP number accounts for 75 % to 80% of total U.S. employment, excluding government, self-employed, and farm workers, among other categories. The going wisdom among economist and academics is that the U.S. economy needs to add an average of 100,000 to 150,000 jobs each month to offset population growth and keep the unemployment rate steady. The market’s initial reaction will largely be based on the difference between the actual and the forecast change in non-farm payroll workers.

• Unemployment rate: The unemployment rate measures unemployed individuals seeking work as a percentage of the civilian labor force. Increases in the unemployment rate are typically interpreted as a sign of weakness in the labor market and the economy overall, while declines in the rate are considered a positive indicator of the job situation.

• Change in manufacturing payrolls: Measures the number of jobs added or lost in manufacturing industries and is looked at as a gauge of near-term production activity.

• Average hourly earnings: Measures the change in employee wages and is looked as an indicator of whether incomes are rising or falling and the implications for consumer spending.

• Average weekly hours: Measures the average number of hours worked each week and is looked at as a rough gauge of the demand for labor, with increasing weekly hours seen as a positive for the labor market.

ADP national employment report (Relevance: Medium)

The ADP national employment report is put together by the payroll processing company of the same name (www.adp.com) and comes out on Wednesdays at 8:15 a.m. ET, two days before the government’s NFP report. The ADP report is intended to serve as an alternative measurement of the labor market, but it’s a relative newcomer, having debuted in mid-2006. The report’s issuers say it has a roughly 90 percent correlation to the government NFP report over its lifetime, but several large discrepancies between the ADP report and the NFP report in the ADP report‘s first year have left market participants uncertain about how much weight to give the ADP report. At the moment, the ADP report seems to produce little market reaction on its own. Instead, the market may adjust its forecasts for the NFP depending on what the ADP indicates.

Weekly initial unemployment claims (Relevance: Law)

Initial jobless claims are reported every Thursday at 8:30 a.m ET for the week ending the prior Saturday and represent first-time filings for unemployment insurance. Initial claims are looked at as interim updates on the overall labor market between monthly NFP reports. The changes in initial claims can be volatile on a week-to-week basis - there are a fair number of hiccups caused by weather, strikes, and seasonal labor patterns - so analysts look at a four-week moving average of initial claims to factor out one-off events. Still, sharp increases or declines in initial claims data will get the market’s attention, producing a market reaction on their own, as well as causing estimates of upcoming monthly NFP reports to be downgraded or upgraded.

A second part of the weekly claims report is continuing claims, which is a measure of the total number of people receiving unemployment benefits, excluding first-time filers. The market looks at continuing claims as another gauge of labor-market conditions. Increases in continuing claims typically suggest deterioration in the job market, because unemployed individuals are finding it difficult to get work and staying on unemployment insurance longer. Declines in continuing claims are similarly viewed as an improvement in the job market, because workers are presumably finding jobs more easily.

Inflation Gauges

Inflation reports are used to monitor overall changes in price levels of goods and services and as key inputs into setting monetary-policy expectations. Increases in inflation are likely to be met with higher interest rates by central bank policy makers seeking to stamp out inflation, while moderating or declining inflation readings suggest generally lower interest-rate expectations.

There are a number of different inflation reports, with each focused on a different source of inflation or stage of the economy where the price changes are appearing. In the United States and other countries, inflation reports come out on a headline (total) basis and a core basis (which excludes food and energy to minimize distortions from these volatile inputs). Inflation reports report changes on a month-to-month basis (abbreviated MoM, for month-over-month) to monitor short-term changes; as well as changes over the prior year’s levels (YoY, for year-over-year) to gauge the longer-term rate of inflation. The main inflation reports to keep an eye on are

• Consumer price index (CPI) (Relevance: High): The CPI is what most people are familiar with when they think of inflation. The CPI measures the cost of a basket of goods and services at the consumer or retail level – the prices that we’re paying. The CPI is looked at as the final stage of inflation.

• Producer price index (PPI) (Relevance: Medium): The PPI measures the  change in prices at the producer or wholesale level, or what firms are  charging one another for goods and services. The PPI looks at upstream inflation by stage of processing and may serve as a leading indicator of overall inflation.

• Personal consumption expenditure (PCE) (Relevance: High): The PCE is roughly equivalent to the CPI in that it measures the changes in price of a basket of goods and services at the consumer level. But the PCE has the distinction of being preferred by the Federal Reserve as its main inflation gauge because the composition of items in the PCE basket changes more frequently than in CPI, reflecting evolving consumer tastes and behavior. If the Fed thinks the more-dynamic basket is the one to watch, who are we to disagree? When the Fed refers to an inflation target or tolerable level of inflation, it’s typically referring to core PCE readings.

• Gross domestic product (GDP) deflator (Relevance: Low): The GDP  deflator is a broad measure of inflation used to convert current GDP output to a constant-dollar value of GDP for historical comparison purposes. The GDP deflator is also called the implicit price deflator and is reported as part of the quarterly GDP release.

• Institute for Supply Management (ISM) prices paid index (Relevance: Medium): The national and regional purchasing managers indices have subcategories reporting on the level of prices paid and the level of prices received by firms. The prices-paid component usually gets the most attention as another corporate-level indication of price pressures, likely to be mirrored by the PPI.

Gross domestic product (Relevance: High)

Gross domestic product (GDP) measures the total amount of economic activity in an economy over a specified period, usually quarterly and adjusted for inflation. The percentage change in GDP from one period to the next is looked at as the primary growth rate of an economy. If GDP in the first calendar quarter of a year is reported as +0.5 percent, it means the economy expanded by 0.5 percent in the first quarter relative to the prior fourth quarter’s output. GDP is frequently calculated on a quarterly basis but reported in annualized terms. That means a 0.5 percent quarterly GDP increase would be reported as a 2 percent annualized rate of growth for the quarter (0.5 percent x 4 quarters = 2 percent). The use of annualized rates is helpful for comparing relative growth among economies.

In most countries, GDP is reported on a quarterly basis, so it’s taken as a big picture reality check on overall economic growth. The market’s economic outlook will be heavily influenced by what the GDP reports indicate. Better than-expected growth may spur talk of the need for higher interest rates, while steady or slower GDP growth may suggest easier monetary policy ahead. At the same time, though, GDP reports cover a relatively distant economic past - a quarter’s GDP report typically comes out almost midway through the next quarter and is looking back at economic activity three to four months ago. As a result, market expectations continue to evolve based on incoming data reports, so don’t get too caught up in GDP for too long after its initial release.

Trade and current account balances

Two of the most important reports for the forex markets, because there are direct and potentially long-term currency implications, are trade balance and current account balance:

• Trade balance (Relevance: High) measures the difference between a  nation’s exports and its imports. If a nation imports more than it exports, it’s said to have a trade deficit, if a nation exports more than it imports, it's said to have a trade surplus. Trade balances are reported on a monthly basis; prior periods are subject to revision.

• Current account balance (Relevance: High) is a broader measure of international trade, and includes financial transfers as well as trade in goods and services. Current accounts are also either in deficit or surplus, reflecting whether a country is a net borrower or lender to the rest of the world. Nations with current account deficits are net borrowers from the rest of the world, and those with current account surpluses are net lenders to the world. Current account reports are issued quarterly, and because the monthly trade balance comprises the bulk of the current account balance, markets tend to have a good handle on what to expect in current account data.

Countries with persistently large trade or current account deficits tend to see their currencies weaken relative to other currencies, while currencies of countries running trade surpluses tend to appreciate. The basic idea is that the currency of a deficit nation is in less demand (it’s being sold to buy more foreign goods) than the currency of a surplus nation (it’s being bought to pay for domestically produced goods).

For example, the U.S. dollar has been under pressure for the past several years owing to its widening (increasing) trade and current account deficits. In late 2006, however, the size of the deficit stopped increasing, which removed some of the pressure on the dollar. But because the deficit remains high in absolute and historical terms, the U.S. trade deficit is still a major U.S. dollar negative.

Another economic report that tends to serve as a counterweight to the U.S. trade and current account deficits is the net foreign purchases of securities report, issued monthly by the U.S. Treasury and commonly known as the TIC report. (TIC is short for Treasury International Capital.) The TIC report tallies net financial inflows into and out of the United States for stocks, bonds, and other securities. If investment inflows into the United States are sufficient to cover the monthly trade deficit, the thinking is that the United States is still able to attract sufficient funds from abroad, and the U.S. dollar need not weaken. (For more on the TIC reporting system, check out www.treas.gov/tic)

Leading economic indicators: (Relevance: Low)

The index of leading economic indicators (LE1) is compiled by the Conference Board and issued on a monthly basis. The index is based on ten components that typically lead overall economic developments, such as initial unemployment claims, average hourly wages, and consumer sentiment, to single out just a few.

The LEI index is looked at as a gauge of the economy's direction over the next six to nine months. Increases in the index point to stronger growth in the months ahead, while declines in the index point to likely future weakness. Because eight of the ten components in the index are known in advance of its release, the LEI index tends to have a subdued market impact, but it's still useful to guide future expectations.

Institute for Supply Management and purchasing managers reports

The Institute for Supply Management (ISM) calculates several regional and national indices of current business conditions and future outlooks based on surveys of purchasing managers. ISM readings are based on a boom/bust scale with 50 as the tipping point - a reading above 50 indicates expansion, while a reading below 50 signals contraction.

The main ISM reports to keep an eye on are

• Chicago Purchasing Managers Index (PMI) (Relevance: Low):The  Chicago PMI remains the key regional manufacturing activity index because the Chicago area and the Midwest as a whole are still significant hubs of manufacturing activity in the United States. The Chicago PMI is also the first of the national PMIs to be reported, and the market frequently views it as a leading indicator of the larger national ISM manufacturing report, which is released a few days after the Chicago PMI.

• ISM manufacturing report (Relevance: Medium): The ISM manufacturing report is the monthly national survey of manufacturing activity and is one of the key indicators of the overall manufacturing sector. The ISM manufacturing report also includes a prices-paid index, which is viewed as an interim inflation reading, along with other key subsector measurements, like the employment situation. The market tends to react pretty aggressively to sharp changes in the report or if the ISM is moving above or below 50, but keep in mind that the manufacturing sector accounts for a relatively small portion of overall U.S. economic activity, so the importance of the ISM manufacturing gauge tends to be exaggerated.

• ISM non-manufacturing report (Relevance: Medium): The ISM non-manufacturing report is the monthly ISM report that covers the other 80 percent of the U.S. economy. The ISM manufacturing report may get more attention, but the ISM non-manufacturing report is the one to focus on.

Consumer sentiment reports

Consumer psychology is at the heart of the market’s attempts to interpret future consumer activity and, with it, the overall direction of the economy. The theory is that if you feel good, you‘ll spend more, and if you feel lousy, you‘ll stop spending. The market likes to pay attention to consumer confidence indicators even though there is little correlation between how consumers tell you they feel and how they’ll actually go on to spend.

In fact, consumer sentiment is more frequently the result of changes in gasoline prices, how the stock market is faring, or what recent employment indicators suggested. More reliable indicators of consumer spending are money-in-the-pocket gauges like average weekly earnings, personal income and spending, and retail sales reports. Still, the market likes to react to the main sentiment gauges, if only in the short run, with improving sentiment generally supporting the domestic currency and softer sentiment hurting it. The key confidence gauges are:

• Consumer confidence index (Relevance: Medium): A monthly report  issued by the Conference Board comprised of the expectations index (looking six months ahead) and the present-situation index. The surveys ask households about their outlooks for overall economic conditions, employment, and incomes.

• University of Michigan consumer sentiment index (Relevance: Medium): Comes out twice a month: a preliminary reading in the middle of the month and a final reading at the start of the next month.

• ABC Consumer Confidence (Relevance: Low): A weekly consumer-sentiment report issued each Tuesday evening. The weekly ABC confidence report can be used to update your expectations of upcoming monthly consumer confidence and University of Michigan reports.

If market forecasts envision an increase in the Michigan or Conference Board’s consumer confidence index, for example, but the prior two or three weeks of the ABC survey suggest confidence is waning, you’ve got a pretty good indication that the monthly surveys may disappoint.

Personal income and personal spending (Relevance: Medium)

These two monthly reports always come out together and provide as close an indication as we can get of how much money is going into and out of consumers’ pockets. The market looks at these reports to get an update on the health of the U.S. consumer and the outlook for personal consumption going forward. Personal income includes all wages and salaries, along with transfer payments (like Social Security or unemployment insurance) and dividends. Personal spending is based on personal consumption expenditures for all types of individual outlays.

Personal income is watched as a leading indicator of personal spending on the basis that future spending is highly correlated with personal income. The greater the increases in personal income, the more optimistic the consumption outlook will be, and vice versa. But it’s important to note that inflation adjusted incomes are the key. If incomes are just keeping pace with inflation, the outlook for spending is less positive.

Retail sales (Relevance: High)

The monthly advance retail sales report is the primary indicator of personal spending in the United States, covering most every purchase Americans make, from gas-station fill-ups to dinner out and a night at the movies. Retail sales are reported on a headline basis as well as on a core basis (which excludes automobile purchases). The market focuses mainly on the core headline to get a handle on how the consumer is behaving, but substantial strength or weakness in the auto industry doesn’t go unnoticed, because it still plays a major role in the manufacturing sector. The advance retail sales report is a preliminary estimate based on survey samples and can be revised substantially based on later data.

Retail sales reports are subject to a variety of distorting effects, most commonly from weather. Stretches of bad weather, such as major storms or bouts of unseasonable cold or heat, can impair consumer mobility or alter shopping patterns, reducing retail sales in the affected period. Sharp swings in gasoline prices can also create illusory effects, such as price spikes leading to an apparent increase in retail sales due to the higher per-gallon price, while overall non-gas retail sales are reduced or displaced by the higher outlays at the pump.

Durable goods orders (Relevance: Medium)

Durable goods orders are another major monthly indicator of consumption, both by individuals and businesses. Durable goods measure the amount of orders received by manufacturers that produce items made to last at least three years. As a data series, durable goods is one of the most volatile of them all, with multi-percentage swings (as opposed to 0.1 % or 0.3 % changes) between months a norm rather than an exception. Durable goods are reported on a headline basis and on a core basis, excluding transportation, or ex-transportation (mostly aircraft).

Durables are generally bigger-ticket purchases, such as washing machines and furniture, so they’re also looked at as a leading indicator of overall consumer spending. If consumers are feeling flush with cash and confidence, big ticket spending is more common. If consumers are uncertain, or times are tight, high-cost purchases are the first to be postponed. Also, businesses tend to concentrate their spending in the final month of each quarter, which can distort prior months and exaggerate the last.

Housing-market indicators

The housing market in the United States and other major economies has taken on increased importance in recent years as real-estate valuations increased dramatically, ultimately producing the dreaded real-estate bubble. As a result, the housing sector has become an important factor in gauging the overall economic outlook.

There’s a raft of monthly housing market reports to monitor the sector, based on whether the homes are new or existing:

ü  Existing-home sales (Relevance: High) is reported by the National Association of Realtors (NAR). Sales of pre-existing homes (condos included) account for the lion’s share of residential real-estate activity - about 85% of total home sales. Existing-home sales are reported on an annualized rate, and the market looks at the monthly change in that rate. Median home prices and the inventory of unsold homes are important clues to how the housing market is evolving. Existing-home sales are counted after a closing. Pending home sales are a separate report viewed as a leading indicator of existing home sales. Pending home sales are counted when a contract is signed to buy an existing home.

ü  New-home sales (Relevance: Medium) are just that, brand-new homes and condos built for sale, reported on an annualized basis. New-home sales account for about 15% of residential home sales, but the sector was the fastest growing during the recent real-estate boom and has since seen activity decline steeply. New home sales are counted when a contract is signed to purchase the new home, which means that contract cancellations (not reported) may result in lower actual sales than originally reported.

ü  Housing starts (Relevance: Medium) measure the number of new-home  construction starts that took place in each month, reported on an annualized rate. Housing starts are considered a leading indicator of new-home sales but more recently have been looked at as an indication of home builder sentiment, as builders try to reduce inventories of unsold new homes.

ü  Building permits (Relevance: Medium) are the starting point of the whole new-housing cycle and are reported alongside housing starts each month. Building permits are required before construction can begin on  new homes, so they’re viewed as another leading indicator of housing starts and new-home sales. 

Regional Federal Reserve Indices

A number of the Federal Reserve district banks issue monthly surveys of business sentiment in their regions, usually concentrated on the manufacturing sector; The regional Fed indices are looked at on their own as well as for what they suggest about subsequent national sentiment surveys, like the ISM index. The main index reading is a subjective response on general business conditions, with responses above zero indicating that conditions are improving and readings below zero indicating deterioration. Here are the main regional Fed indices to watch:

ü  Philadelphia Fed index (Relevance: Medium): Usually the first of the major Fed indices to be reported each month, covering the manufacturing sector in Pennsylvania, New Jersey, and Delaware.

ü  New York Empire State index (Relevance: Medium): Assesses New York state manufacturers’ current and six-month outlooks.

ü  Richmond Fed manufacturing index (Relevance: Low): A composite index based on new orders, production, and employment, covering the Middle Atlantic states.

The Fed s Beige Book (Relevance: High)

The Beige Book is a compilation of regional economic assessments from the Fed's 12 district banks, issued about two weeks before every Federal Open Market Committee (FOMC) policy-setting meeting. (The Beige Book gets its name from the color of its cover.) The regional Fed banks develop their summaries based on surveys and anecdotal reporting of local business leaders and economists, and the report is then summarized by one of the Fed district banks, all of which take turns issuing the report. The Beige Book is designed to serve as the basis of economic discussions at the upcoming FOMC meeting.

Markets look at the Beige Book’s main findings to get a handle on how the economy is developing as well as what issues the FOMC might focus on. A typical Beige Book report may include generalized observations along the following lines: Most districts reported retail sales activity was steady or expanding moderately; a few districts reported declines in manufacturing activity; some districts noted increased labor market tightness and rising wage demands; all districts noted a sharp slowing in real-estate activity.

 The key for the market is to assess the main themes of the report, such as:

ü  Is the economy expanding or contracting? How fast, and how widespread?

ü  Which sectors are strongest, and which sectors are weakest?

ü  Are there any signs of inflation? '

ü  How does the labor market look?

The Beige Book is released in the afternoon (New York time), when liquidity is thinner, so it can generate a larger-than-normal response if its tone or conclusions are significantly different from what markets had been expecting.