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ConceptsConcepts
Variables that provide information about Variables that provide information about the state of the economy.the state of the economy.
Every economic indicator has a story to Every economic indicator has a story to tell.tell.
Need to be able to make sense of the Need to be able to make sense of the entire picture. entire picture.
GDP=C+I+G+NXGDP=C+I+G+NX
Consumption:Consumption: Retail salesRetail sales Consumer credit Consumer credit Personal income and spendingPersonal income and spending Employment reportEmployment report New claims for unemployment insuranceNew claims for unemployment insurance Consumer confidenceConsumer confidence Auto salesAuto sales Chain store salesChain store sales
InvestmentInvestment
NonresidentialNonresidential Industrial productionIndustrial production Capacity utilizationCapacity utilization Orders for durable goodsOrders for durable goods ISM surveysISM surveys Factory ordersFactory orders Manufacturers’ shipmentsManufacturers’ shipments
InvestmentInvestment ResidentialResidential
Housing startsHousing starts New single-family home salesNew single-family home sales Existing home salesExisting home sales Mortgage applicationsMortgage applications
GovernmentGovernment Construction spendingConstruction spending Federal budget balanceFederal budget balance
Net ExportsNet Exports International tradeInternational trade Current account balance Current account balance
InflationInflation
Consumer price indexConsumer price index Producer price indexProducer price index Employment cost indexEmployment cost index Non-farm productivityNon-farm productivity Unit labor costsUnit labor costs Import and export pricesImport and export prices Employer costs for employee Employer costs for employee
compensationcompensation
International IndicatorsInternational Indicators
German industrial productionGerman industrial production German consumer price indexGerman consumer price index Japan Industrial productionJapan Industrial production France monthly business surveyFrance monthly business survey OECD composite leading indicatorOECD composite leading indicator China industrial productionChina industrial production Other major countries’ industrial Other major countries’ industrial
productionproduction
Composite IndicatorsComposite Indicators
Indicator composed of various series. Indicator composed of various series. Bureau of Economic AnalysisBureau of Economic Analysis Organization for Economic Cooperation and Organization for Economic Cooperation and
Development (OECD)Development (OECD) National Bureau of Economic ResearchNational Bureau of Economic Research Private consulting firmsPrivate consulting firms
Cycle of the IndicatorCycle of the Indicator
Leading indicator: used to predict changes in the Leading indicator: used to predict changes in the economy. Its trajectory changes before the economy economy. Its trajectory changes before the economy follows a particular pattern. i.e. Conference Board LIfollows a particular pattern. i.e. Conference Board LI
Coincident indicator: varies simultaneously with the Coincident indicator: varies simultaneously with the business cycle. It indicates current economic business cycle. It indicates current economic conditions. i.e. industrial production conditions. i.e. industrial production
Lagged indicator: follows the business cycle with Lagged indicator: follows the business cycle with lags. It illustrates where the economy has been. i.e. lags. It illustrates where the economy has been. i.e. corporate profitscorporate profits
Understanding Economic IndicatorsUnderstanding Economic Indicators
Background Economic Theme: Recognize the stage of Background Economic Theme: Recognize the stage of
the business cycle.the business cycle.
-200
-100
0
100
200
300
8000
8400
8800
9200
9600
10000
10400
10800
96 97 98 99 00 01 02 03 04
USAGDP Trend Cycle
Hodrick-Prescott Filter (lambda=1600)
Understanding Economic IndicatorsUnderstanding Economic Indicators
Identify their breath in coverage. Identify their breath in coverage.
Be aware of data revisions.Be aware of data revisions.
Handling an Economic IndicatorHandling an Economic Indicator
Real vs. Nominal valuesReal vs. Nominal valuesmost professionals care about real valuesmost professionals care about real values
Nominal vs RealNominal vs Real
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
95 96 97 98 99 00 01 02 03 04
M1 Nominal
3000
4000
5000
6000
7000
8000
9000
94 95 96 97 98 99 00 01 02 03 04
M1 Real
Handling an Economic IndicatorHandling an Economic Indicator
Original vs. adjusted series Original vs. adjusted series a)a) Trend – cycleTrend – cycle
b)b) Seasonal adjustmentSeasonal adjustment
c)c) Moving AverageMoving Average
1200000
1300000
1400000
1500000
1600000
1700000
1800000
96 97 98 99 00 01 02 03 04
Adjusted Original
Handling an Economic IndicatorHandling an Economic Indicator
Growth ratesGrowth ratesa)a) Month to month or Quarter to QuarterMonth to month or Quarter to Quarter
b)b) Year to yearYear to year
-.004
.000
.004
.008
.012
.016
.020
96 97 98 99 00 01 02 03 04
GDP Quarterly Change
.00
.01
.02
.03
.04
.05
.06
96 97 98 99 00 01 02 03 04
GDP Year to Year Change
Handling Economic IndicatorsHandling Economic Indicators
Flows vs StocksFlows vs Stocks
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
94 95 96 97 98 99 00 01 02 03 04
M1 Stock
-60000
-40000
-20000
0
20000
40000
60000
80000
100000
94 95 96 97 98 99 00 01 02 03 04
M1 flow
GDPGDP
Published by: Bureau of Economic AnalysisPublished by: Bureau of Economic Analysis Frequency: QuarterlyFrequency: Quarterly Period Covered: prior quarterPeriod Covered: prior quarter Volatility: ModerateVolatility: Moderate Market significance: very highMarket significance: very high Web site: Web site: www.bea.govwww.bea.gov How do markets react?How do markets react?
GDP GDP ↑ > Stock market ↑↑ > Stock market ↑
GDP ↑ > Bond market ↓GDP ↑ > Bond market ↓
GDP ↑ > Dollar appreciatesGDP ↑ > Dollar appreciates
Some details:Some details:
- best measure of economic activity- best measure of economic activity
- 3 estimates every quarter: - 3 estimates every quarter:
a) Advance report: first month of the a) Advance report: first month of the
quarter. It is based on consumption quarter. It is based on consumption
information and some information on the information and some information on the
other components of GDP.other components of GDP.
b) Preliminary report: second month of the b) Preliminary report: second month of the
quarter, includes almost all information.quarter, includes almost all information.
c) Revised (or final) report: third month of the c) Revised (or final) report: third month of the
quarter, includes all information.quarter, includes all information.
- - The GDP report contains two estimates of realThe GDP report contains two estimates of real
GDPGDP
1. Built from the final demand categories: 1. Built from the final demand categories:
C+I+G+NXC+I+G+NX
2. Built from the income side: 2. Built from the income side: Personal income and corporate Personal income and corporate
profitprofit
by construction 1 = 2by construction 1 = 2
- The GDP report contains information about inflation:- The GDP report contains information about inflation:
1. Implicit deflator: measures a combination of price1. Implicit deflator: measures a combination of pricechanges and changes in the composition of GDP. changes and changes in the composition of GDP. Not a pure measure of inflation. Not a pure measure of inflation.
2. Fixed-weight deflator: provides a measure of price2. Fixed-weight deflator: provides a measure of pricechanges for a given basket of goods and services. Itchanges for a given basket of goods and services. Itis a pure measure of inflation. is a pure measure of inflation.
3. Chain weighted price deflator: the index allows 3. Chain weighted price deflator: the index allows the quantity of purchase-weights to vary over time.the quantity of purchase-weights to vary over time.Hence, real output is based on contemporaneous Hence, real output is based on contemporaneous spending patterns. spending patterns.
- Note that it is possible to use information on monthly - Note that it is possible to use information on monthly
indicators to forecast GDP indicators to forecast GDP
EX. Personal consumption expenditures:EX. Personal consumption expenditures:
-Durable goods-Durable goods
-Non-durable goods-Non-durable goods
- Services- Services
- Keys to interpreting the GDP report:- Keys to interpreting the GDP report:
a) Pay close attention to inventory changes, the a) Pay close attention to inventory changes, the
behavior of inventories has significant implicationsbehavior of inventories has significant implications
for future growth. for future growth.
b) Focus upon the GDP chain-weighted price index b) Focus upon the GDP chain-weighted price index
as the most comprehensive measure of prices in the as the most comprehensive measure of prices in the
economy. It is a more comprehensive price indicatoreconomy. It is a more comprehensive price indicator
than the CPI or the PPI. than the CPI or the PPI.
c) Look at the pace of exports and imports. It has c) Look at the pace of exports and imports. It has
implications for the exchange rate market. implications for the exchange rate market.
d) Keep in mind that, traditionally, revisions to thed) Keep in mind that, traditionally, revisions to the
GDP figures have a significant impact on financialGDP figures have a significant impact on financial
markets. markets.
DATADATABillions of current dollarsBillions of current dollars
2004Q1 11457.12004Q2 11666.12004Q3 11818.82004Q4 11995.22005Q1 12198.82005Q2 123782005Q3 12605.72005Q4 12760.4
ForecastForecast
2004Q1 11457.1 11156.28
2004Q2 11666.1 11361.65
2004Q3 11818.8 11544.5
2004Q4 11995.2 11734.3
2005Q1 12198.8 11919.73
2005Q2 12378 12097.7
2005Q3 12605.7 12294.43
2005Q4 12760.4 12485.73
2006Q1 12581.37
DiscussionDiscussion
Based on the forecast provided by a Based on the forecast provided by a Moving Average, the value of GDP for the Moving Average, the value of GDP for the first quarter of 2006 will be 12581.27 first quarter of 2006 will be 12581.27 billions of dollars. billions of dollars.
That number would imply an increase of 3 That number would imply an increase of 3 percent.percent.
Hence, we can conclude that the economy Hence, we can conclude that the economy will continue expanding. will continue expanding.