Understanding Key Economic Indicators

?? á??×è¨ By Desmond Lum     In these times when market forces appear increasingly complicated and more volatile, it is all the more important to understand the professional jargon and terminology in themarket place in order to be able to better make our investmentand business decisions. Understanding key-economic indicatorswill assist in the decision making process, providing a snapshotof the current situation and an insight into the future.     Each economic indicator tells us something about the economy or inflation. Gross Domestic Product (GDP) is probably the most important report as it is the whole framework where other economic indicators fall under. Using the textbook formulawhere Gross National Product = Consumption   Investment   Government Spending   Exports - Imports, some of the indicators will fall into the above-mentioned category e.g. retail sales figures will fall under Consumption, construction spending under investment, to name a few.    There are also indicators that are broader that tell us about the economy itself rather than the component, e.g. employment figures, leading indicators, money supply figures(M3). Inflation figures, Produce Price Index (PPI) and the Consumer Price Index (CPI) will, in short , inform us of the changes in wholesale prices , cost of consumer (retail) goods and services respectively.     An indicator that is useful must be accurate, timely and reliable. It depends entirely on the integrity of the national statistical system responsible. It is vital to know the accurate components of an indicator. We have to be mindful of the limitation of these statistical figures too.    Some indicators can be historic or extremely volatile, andtherefore their value are reduced. It is better to compare the most recent data with earlier months, or take a moving average for the past 3,6 or 12 months to smooth the data. It will tell us if there has been a significant change in trend and whether a new direction is under way.    Timeliness of an indicator is also significant. Although the reported figures are important, it is crucial to recognise that markets react to the variance to the consensus forecast than to the absolute change in the indicator. Markets do not like surprises and can be frustrated with volatility upon subsequent revisions to the numbers published, even though significance of the absolute number diminishes with each passing month.    In the US, together with the monthly employment report released on the first Friday of the month, an important survey by US National Association of Purchasing Management (NAPM) is released within the first three business day of the month, which tracks the economic movements fairly well. These two reports are considered by many as valuable adjunct
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