Bloomberg Market Concepts Economic Indicators (A GUARANTEED)

Bloomberg Market Concepts Economic Indicators (A GUARANTEED) Bloomberg Market Concepts Economic Indicators The Primacy of GDP ● Main measure of economic activity ● World GDP: 8% compounded annual growth over 50 years ● How accurately do GDP statistics portray the economy? ○ Inaccurately because the scope of GDP measurements can change ● Economic growth is cyclical, with series of booms and busts ● Investors interpret economy through economic indicators ● Leading indicators attract the most investor interest Economic statistics Essential Economic Indicators ● Economic growth ○ Gross domestic product ○ Market value of all final goods and services in a country ○ GDP = C + I + G + (X-M) ○ C = personal consumption ○ I = private investments ○ G= gov consumptions ○ X = exports ○ M = imports ○ Different countries have different emphasis on GDP (example: in America personal consumption makes up most of GDP, while in China it is Private investment) ○ Important: percentage change in GDP from one year to the next ○ Nominal GDP - inflation = Real GDP Growth ○ Real GDP growth: only production, taken out inflation effects ○ Recession: 2 successive quarters of negative real GDP growth ● Inflation ○ Erodes value of bonds ○ General increase in prices of goods and services ○ Decreases purchasing power of money ○ Sources of inflation data: quarterly GDP report, monthly CPI ○ CPI needs to be fully representative of consumer spending ○ Inflation basket ○ What was a representative basket yesterday may not be representative today ● Unemployment ○ Consumer spending based on salaries ○ Economy shrinks when unemployment rises ○ GDP growth is depressed when unemployment rises ● Business confidence ○ Business consumers make more investments when they feel confident there will be a demand for their goods and services in the future○ ISM: gauges business confidence ○ Above 50: optimism ○ Below 50: pessimism ○ PMI and GDP move together ○ PMI is best leading economic indicator ● Housing ○ Housing starts → house building ○ Buying new house = buying new products as well ○ Housing starts against real gdp growth → there is a relationship Monitoring GDP ● World economic indicators → US ● Check monthly: PMI, nonfarm payrolls (unemployment report), housing, inflation, CPI (in that order) ● Check if actual is better than surveyed ● First inkling comes from PMI ○ This will tell us about US business confidence ● GDP is released every quarter ○ 1st quarter: end of April ● GDP often fails to surprise because other indicators give hints ● GDP estimation by govs is time-consuming, activity ● GDP arrives too late to be useful to investors ● Instead, glean GDP growth through related indicators ● The indicators that are released first attract the most attention Forecasting GDP ● Analysts forecast key economic indicators ● Long-term economic estimates are foundational to financial markets ● Changes in estimates illustrates economic optimism and pessimism ● Significant changes may herald an economic turning point ● Investors compile many indicators, rather than one, to predict turning points ● Turning points ● Investment banks create estimates of economic indicators to know when specific economic data points are a positive or negative surprise ● Economic surprise monitor ○ Surprise moves markets