When formulating trading strategies, investors frequently take the strength of different economies into consideration. By having greater insight into the vigor of the U.S., the world's largest economy, forex traders can potentially set up better-informed trades. The strength of the U.S. dollar depends at least somewhat on the vigor of business conditions in the nation.
The economy of any country is complex, and it involves many different activities with intricate relationships. To make evaluating business conditions a bit easier, some forex traders employ economic indicators to help gauge a country's economic state.
US Economic Indicators
Those interested in evaluating U.S. business conditions can benefit from making sure they are familiar with a handful of frequently used economic indicators. Without knowledge of such measures, investors will have a hard time interpreting the latest news.
To make things a bit easier, this article provides a list of top economic indicators for the U.S.
Gross Domestic Product
GDP is the traditional yardstick used to measure the strength of economies. At its most basic level, GDP means economic output. More specifically, it is the final value of all goods and services produced by a nation in any one year.
Calculating GDP: GDP can be calculated by adding Consumption, Investment, Government Expenditure and Net Exports. When put in equation form, it looks like this: GDP = C + I + G + (X-N)
Real GDP vs. Nominal GDP: Real GDP accounts for inflation, while Nominal GDP does not. Because Real GDP accounts for inflation, the measure can be used to compare a nation's economic output between different years.
Multiple Revisions: The Bureau of Economic Analysis, an agency of the Department of Commerce, calculates GDP for the U.S. For every quarter and every year, the BEA releases three estimates of this societal output. These include the Advance estimate, the Second estimate and the Third estimate. By checking the BEA website, a forex trader can obtain the schedule of GDP estimates.
Shortcomings: Many have criticised GDP by stating that it is a less-than-ideal way to measure the strength of a country's economy. For example, if the crime rate goes up, this development could spur the purchase of more security systems, which bolsters consumption and therefore output.
Consumer Price Index
CPI is the benchmark gauge of inflation. The U.S. Department of Labor's Bureau of Labor Statistics releases this measure every month and year that's based on a market basket of goods and services. This indicator is a measure of the cost of living and helps show how goods and services become more expensive over time. It is frequently tied to fixed-income payment calculations, which make use of cost-of-living adjustments.
What It Contains: The CPI comprises several different major categories, which include food, housing expenses, medical care, transportation, clothing, education and miscellaneous goods and services such as haircuts and tobacco. The exact goods included in the market basket are determined by consumer surveys which take place every year.
How It Is Calculated: The BLS has data collectors gather information on roughly 80,000 items every month by visiting or calling thousands of different establishments, such as service providers and retail stores. The collectors send this information back to the agency's headquarters, where specialists analyse any data sent to ensure stability. The information is then put into indexes.
Limitations: Forex traders might want to know that the CPI does not include the value of many items that play a key role in investment, for example stocks, bonds, life insurance and real estate.
Current Employment Statistics
Every month, the BLS collects information on employment, earnings and hours worked by using the CES program. Through regular surveys, the BLS reaches out to more than 140,000 companies and government agencies and close to 600,000 work locations.
Unemployment Rate: The economic indicator used most frequently to measure the strength of the labor market is the unemployment rate, which is frequently symbolised as UE. This rate is a lagging indicator, meaning that its fluctuations will frequently trail GDP by between three and six months. UE frequently factors into policy, and the Federal Reserve has a dual mandate that includes keeping this rate low.
Average Workweek: This measure shows the number of hours worked by the average American in a given week. It helps provide a glimpse into how many hours employers are giving the nation's workers. Every month, the BLS gathers information on a range of sectors to determine how many hours the average employee works.
Hourly Earnings: Many economists watch this indicator, as it can be a strong predictor of inflation. Real hourly earnings (meaning hourly earnings adjusted for inflation) tend to rise as the labor market tightens. In contrast, they can decline if the job market worsens. These earnings can be a helpful measure of buying power, which can in turn affect consumption.
Consumer Confidence Surveys
These surveys help provide the broader public with a sense of how consumers view overall business conditions. Every month, the Conference Board surveys thousands of Americans about how they believe the labor market and the overall economy will fare in the coming months. In addition, the University of Michigan conducts its Surveys of Consumers, which involves asking 500 random individuals about business conditions, their personal finances and their plans to purchase items in the future.
Personal Income And Outlays Report
This report, produced by the BEA on a monthly basis, provides insight into how much income individuals are bringing in, their expenditures and what they are spending their money on.
By reading this report, forex traders can obtain a better sense of how much the average American is earning along with which fraction of their post-tax income is going toward spending versus savings. If consumer spending starts declining, this could form part of a broader trend of falling expenditures. After the financial crisis, the savings rate rose sharply and reached a high of 5.5%. This figure was far higher than the low of 1.5% reached in 2005. Many blamed the slower recovery on a higher tendency to save.
New Residential Construction
The U.S. Census Bureau provides a monthly report on this activity, which helps give a sense of how much faith builders have in the economy. New Residential Construction comprises building permits, housing starts and housing completions. These forms of activity can provide insight into where an economy is in the business cycle. Early in this cycle, construction will usually pick up.
Housing Starts: These get significant attention because they can help foreshadow changes in the broader economy. Housing starts can respond quickly if mortgage rates should increase or decrease, and mortgage rates in turn depend on interest rates.
Building Permits: These represent the number of housing units that have issued a permit in a certain month. If the housing market is receiving more building permits, economists interpret this as meaning the housing market is attracting greater investment.
By learning more about these top U.S. economic indicators, investors can improve their ability to evaluate business conditions. Armed with an understanding of how the economy is doing, forex traders may be able to set up more effective transactions. Investors should keep in mind that no particular indicator is better than others, and should instead use several of them to better grasp an economy's performance.
Many market observers closely watch the monthly non-farm payrolls for the U.S., monthly reports prepared and released by the U.S. Department of Labor's Bureau of Labor Statistics. These figures help provide insight into the strength of business conditions in the nation. Every first Friday, the BLS releases these reports that contain the number of net jobs created by non-farm employers, along with the unemployment rate.
In each of these documents, the government offers a detailed breakdown of which particular industries gained and lost positions during the month. For example, the November 2015 report revealed that during the month, the nation's employers produced 211,000 net jobs, with construction and professional/technical services supplying 46,000 and 26,000 of these positions, respectively.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…