Whether you’re just starting out or you’re already a regular investor, you often hear news of the stock market going up or down because a certain economic report is released.
These reports may sound boring or even intimidating, but if you understand the basics and how these affect the market, you can take advantage of them and make profits.
In this article, you will learn about the critical economic reports and how they work.
1. Jobs Report
The most critical are the Employment Situation report, which draws dramatic reactions from the market.
The Employment Situation is crucial for investors as it provides information on the growth of jobs and wages – the key measure in assessing the health of an economy.
In particular, it measures how many new jobs are created, how many workers are unemployed, the number of employees working in business or government, their average earnings per week, and how long they work every week. This is based on surveys and is released by the labor department every first Friday of the month.
It sets the tone for other economic indicators that come out within the month, and its components are used as bases in projecting other economic indicators such as inflation, the employment cost index, industrial production, housing starts and construction spending.
These guide investors on the future actions of the Federal Reserve. If wage inflation occurs, the Fed may raise the interest rate, which drags the stock and bond markets. In contrast, if wage inflation decreases, the Fed may decide to lower rates, therefore boosting the markets.
Wall Street companies, analysts, and economists closely follow the jobs report to guide them in their investing decisions.
2. Producer Price Index (PPI)
The Producer Price Index (PPI) is the official measure of average changes in prices received by domestic producers for their output. It covers all US industries that produce physical goods, excluding exports, to reveal trends in the wholesale, manufacturing and commodities markets.
The Bureau of Labor Statistics publishes this data every second or third week of the month, based on samples of producers in the manufacturing, mining, and service sectors.
Commodities that are ready to be sold to the end user are called finished goods. Some commodities are partially processed but still require further processing and these are called intermediate materials, supplies, and components. Meanwhile, crude materials are unprocessed commodities that cannot be sold directly to consumers.
The PPI has three key index figures for these classifications. For crude, the PPI Commodity Index shows the average price change for commodities like energy, coal, crude oil and steel scrap.
For intermediate, there is the PPI Stage of Processing Index for goods that are partially processed but will be further sold to manufacturers to create the finished good. These include lumber, steel, cotton and diesel fuel.
Lastly, finished products are measured by the PPI Industry Index, which is the source of the core PPI.
The most important figure is the core PPI, which is the index for the finished goods minus the food and energy components that are excluded because of their volatility.
The PPI is important to investors because it allows them to predict the Consumer Price Index, which is released shortly after the PPI.
There is a theory that most cost increases experienced by retailers will eventually be passed on to the consumers, and the PPI provides a preview to the CPI. Even the Fed monitors the report for policies that it may undertake to fend off inflation.
The PPI is very important for investors within the sectors covered when it comes to predicting future sales and identifying earnings trends. It also provides an insight into inflation, making it a major market mover.
For latest statistics on the PPI, click here: http://www.bls.gov/news.release/ppi.toc.htm
3. Consumer Price Index (CPI)
One of the most closely watched economic reports is the Consumer Price Index (CPI), which measures the prices of goods and services as experienced by consumers.
Rapid and significant price changes cause shocks to the economy, and the CPI is used to identify whether an economy is experiencing inflation, deflation, or stagflation.
The CPI computes the weighted average prices of a basket of goods and services, like transportation, food and medical care. Within the predetermined basket, price changes in every item are calculated and averaged. An increase in the CPI indicates higher cost of living.
The goods and services are classified into eight groups: Food and Beverages, Housing, Apparel, Transportation, Medical care, Recreation, Education and communication, and Other goods and services.
The Bureau of Labor Statistics releases CPI figures every month, covering various consumer price indices including the CPI-U for urban consumers, CPI-W for Urban Wage Earners and Clerical Workers, CPI-E for the elderly, and C-CPI-U, the chained CPI for all urban consumers.
Investors highly anticipate the release of CPI, which is a major factor in making financial decisions such as the Fed’s interest rate policy and banks’ and corporations’ hedging plans. As an individual investor, you can also gain if you consider the CPI before you make a decision on hedging and allocation.
CPI statistics can be found here: http://www.bls.gov/cpi/
4. ISM Report on Business
The ISM Report on Business (ROB) comes from a survey of purchasing managers that monitors changes in the manufacturing and non-manufacturing sectors. The survey is a major market mover and is considered as one of the most reliable near-term gauge of the health of the US economy.
The ISM ROB is the collective name for two reports: the Manufacturing Report on Business published by the Institute for Supply Management (ISM) every first business day of the month, and the Non-Manufacturing Report on Business released by the ISM every third business day of the month.
ISM gathers data by sending a questionnaire to more than 300 members of the ISM Business Survey Committee, asking them to identify monthly changes for every index.
5. Purchasing Managers’ Index (PMI)
Purchasing Managers’ Indexes (PMI) is a widely followed indicator of the health of the manufacturing sector. It helps manufacturers make decisions based on expected orders in the future, aids suppliers in estimating demand, and helps companies forecast their annual budget, employment levels and cash flow.
The report is based on a survey of private companies. Because of their jobs, purchasing managers are one of the first to know every time trading conditions improve or worsen, therefore affecting company performance.
Two groups release PMIs: ISM for the United States, and the Markit Group, which uses ISM’s output to produce metrics for more than 30 countries.
ISM’s report is made up of five components with equal weights: New Orders, Production, Employment, Supplier Deliveries, and Inventories. The Markit and ISM Purchasing Managers Indices also have additional sub-indices such as exports, stocks of raw materials and finished goods, as well as prices of inputs and finished goods.
The two groups compile the surveys every month but the actual release dates depend on the sector covered. Generally, manufacturing figures are released on the first business day of the month, followed by construction on the second working day, and non-manufacturing/services on the third business day.
An index reading of 50.0 means that the manufacturing situation is unchanged, results over 50.0 indicate an improvement, while a number below 50.0 suggests a decline.
6. Consumer Confidence Index (CCI)
The Consumer Confidence Index (CCI) measures the optimism on the state of the economy which consumers express through saving and spending activities. A rise in CII is good news because consumers account for two-thirds of the country’s economic activity.
The Conference Board adjusts the CCI monthly based on households’ plans for major purchases as well as their current and immediate economic situation. Respondents’ opinions on current conditions account for 40% of the index, while expectations of conditions in the near future make up the balance.
The rationale is that if confidence is going up, consumers spend money, therefore indicating a strong economy. But when confidence is going down, consumers are saving more than they are spending, which means the economy is in trouble. It is believed that the more confident consumers are about the stability of their incomes, the more likely they are to make purchases.
If you want to know more about economic reports, You should visit Trade Genie.
