Economic Indicators

Question 1

What is GDP (meaning, formula)

Answer 1

Gross Domestic Product is the market value of all economic goods and services produced in a country.

Real GDP growth is the main measure of economic activity. If the measurement of economic activity evolves, GDP can change greatly. Calculation is still a work in progress: Italy’s GDP rose by 17% in one year after deciding to include the black market.

GDP = C + I + G + (X - M)

C = Personal consumption
I = Private investment (eg. factories)
G = Government spending
X = Exports
M = Imports

Question 2

GDP in 2021?

Answer 2

1: $23 Trillion (US)

• Primarily from C, More imports than outputs
  #2: $17.7 Trillion (China)

Question 3

Essential economic indicators?

Answer 3

Economic growth, inflation, unemployment, business confidence, housing

Question 4

Real vs Nominal GDP

Answer 4

Real GDP growth = Nominal GDP Growth - Inflation
* Real GDP growth strips out the effects of inflation. Accounts only for the increase in production.

Question 5

Recession

Answer 5

Two successive quarters of negative GDP growth

Question 6

Inflation?

Answer 6

General increase in the prices of goods and services, which diminishes the value of money.
*Erodes the values of bonds

Question 7

Ways to measure inflation?

Answer 7

Monthly PCE (Personal Consumption Expenditures)
* Reports the changes in the price of goods and where consumers spend their money

Monthly CPI (Consumer Price Index)
* Price of a basket of goods and services representative of spending habits in that country.

Question 8

Unemployment

Answer 8

Economy tends to shrink when more people lose their jobs than get hired, as consumers will tend to tighten their purse strings when they lose their job, leading to a decrease in consumer spending. Furthermore, when economy shrinks, employment declines.

Question 9

Business confidence

Answer 9

Historic correlation –PMI indicator usually dipped shortly before GDP declined.

Individual business leaders make larger decisions, and they tend to hire and make investments when they believe there will be additional demand for their goods and services in the future.

ISM – most widely-followed index of manufacturing activity (PMI – Purchasing Managers Index). Surveys people in charge of buying goods and services for cooperations.

A reading above 50 = optimism, below 50 = pessimism.

Question 10

Housing

Answer 10

Number of new houses being built

• Accounts for 3% of GDP, but great indicator because…
  1. Before owners buy houses, need to be confident that consumers are comfortable assuming a 30-year mortgage.
  2. After buying a house, owners buy paint, TVs, kitchens, etc. so residential construction contributes to more than 3% of GDP overall

Question 11

Notes

Answer 11

Real GDP growth is the main gauge of economic health. Economic growth is cyclical, with a series of booms and busts. Investors interpret the economy through economic indicators. Leading indicators attract the most investor interest.

Question 12

GDP is not that important to investors. Why?

Answer 12

GDP is old news – released on a quarterly schedule, and it takes a month after the quarter for the initial GDP report (which uses tax returns etc.) to come out. Investors already gleaned GDP growth from more timely indicators. For investors and traders with a lot of money riding on the economic environment, it’s too outdated. They use economic indicators instead.

Question 13

What is the most important factor in an economic indicator for investors?

Answer 13

What moves markets is surprises (difference between estimates and actual economic indicators etc.) Timeliness of data – the least lag possible – is the most important quality.

Question 14

Timeline of economic indicators?

Answer 14

1: PMI Business confidence indicator published on the first business day of the following month

#2: Nonfarm Payrolls: First Friday of the following month
#3: Housing Starts: Around the middle of the following month
#4: CPI: Around the middle of the following month