Even if you weren't an economics whiz in school, it's important to understand the forces that move interest rates.  Each month there are scheduled economic reports which tell the direction and strength of the economy.  The direction and strength (or weakness) of our economy has a direct bearing on how much we all pay for our home loans, our car loans, and credit cards.  The following is a concise guide to the major reports released and what their relative impact is to the bond and mortgage markets.  

Report:  How Markets React To Economic Indicators

Economic Indicators Summaries:

Auto Sales

Balance of Payments

Balance of Trade (Merchandise Trade Balance)

Beige Book

Business Inventories and Sales

Capital Account / Financial Account

Chain Store Sales

Chicago PMI

Construction Spending

Consumer Confidence

Consumer Credit

Consumer Price Index (CPI)

Consumer Sentiment Index (University of Michigan)

Current Account

Durable Goods Orders

Employment Cost Index (ECI)

Employment Report

Existing Home Sales

Factory Orders and Manufacturing Inventories

FOMC Meeting

Gross Domestic Product (GDP)

Help-Wanted Index

Housing Market Index

Housing Starts/Building Permits

Implicit Deflator

Import Price Index

Index of Leading Economic Indicators (LEI)

Industrial Production and Capacity Utilization

Institute for Supply Management

International Trade

Jobless Claims (Initial)

Money Supply

Mortgage Applications Survey

National Association of Purchasing Managers (NAPM)

New Home Sales

Personal Income and Personal Consumption Expenditures (PCE)

Producer Price Index (PPI)

Productivity

Purchasing Managers’ Index (PMI)

Retail Sales

Wholesale Trade

How Markets React To Economic Indicators

Economic indicators track activity judged to be significant to economic performance, by quantifying the various factors of supply and demand.  Indicators can be used to both explain and to forecast price movement.  To explain market prices, variables are measured concurrently with that price and are assumed to have high correlation.  To forecast market prices, data from each indicator are viewed in relation to past data/price correlations, to data from other indicators and to the business cycle.  Depending on the phase of the business cycle, different economic indicators are more or less able to delineate the pertinent market forces.  Forecasts are only as strong as the data used to make them.  No matter how accurate the estimates may be, most fundamental data is based on data samples.  In addition, these estimates are usually subject to constant revision.  Indicators can also be categorized as Leading Indicators, Lagging Indicators, or Coincident Indicators depending on whether changes in the indicator series happen before, after, or at the same time as changes in the economy.  These categorizations can even be different depending on the phase of the business cycle.  For example, a series tracking the number of people unemployed is categorized as leading for economic peaks, lagging for economic lows, and unpredictable for economic turns.  The series tracking corporate net cash flow, on the other hand, is categorized as leading for economic peaks, economic lows, and economic turns.

Market reaction to economic indicators is determined by:

Ø     consensus -- the market consensus forecast

Ø     revisions -- how significant data revisions are in any previous periods

Ø     reliability -- the reliability and comprehensiveness of the specific economic indicator (breadth in coverage, depth of detail, and timeliness)

Ø     policy makers -- how important the indicator is thought to be to the policy makers (is Greenspan looking at it?)

Generally speaking, bond and currency markets tend to react more to the economic news than the stock indices, which also must take into consideration specific company and industry fundamentals.  Bond Markets are concerned with the pace of economic growth and inflation.  Stock Indices are concerned with earnings, which are driven by economic growth and the asset allocation implications from changes in interest rates. Currency Markets are concerned with the pace of economic growth, inflation, and foreign trade imbalances.

Economic Indicators Glossary

Auto Sales

The number of cars sold during a particular ten-day period.  The timeliness of this indicator (released three days after the 10-day period) makes this the most current piece of US economic data.  The size of the item in question and the timeliness of the release allow auto sales to be a useful leading indicator of retail sales and personal consumption expenditures data.

 Balance of Payments

Complete summary of a nation’s economic transactions and the rest of the world including merchandise, services, financial assets and tourism.  The balance of payments is separated into two main accounts: the current account and the capital account.

Balance of Trade (Merchandise Trade Balance)

The Balance of Trade is the difference between a nation’s exports and imports of merchandise.  A positive balance of trade, or a surplus, occurs when a county’s exports exceed its imports.  A negative balance of trade, or a deficit, occurs when imports surpass exports.  Rising exports add to GDP while falling imports are subtracted from it.  The U.S. merchandise trade balance has been in a deficit since the mid-1970s.  Rising deficits can be reflective of increased consumption, which can be a sign of a strengthening economy.

Beige Book (Fed Survey)

Officially known as the Survey on Current Economic Conditions, the Beige Book, is published eight times per year by a Federal Reserve Bank, containing anecdotal information on current economic and business conditions in its District through reports from Bank and Branch directors, and interviews with key business contacts, economists, market experts, and other sources.  The Beige Book highlights the activity information by District and sector.  The survey normally covers a period of about 4-weeks in duration, and is released two weeks prior to each FOMC meeting, which is also held eight times per year.  While being deemed by some as a lagging report, the Beige Book has usually served as a helpful indicator to FOMC policy decisions on monetary policy.

Business Inventories and Sales

Business inventories and sales figures consist of data from other reports such as durable goods orders, factory orders, retail sales, and wholesale inventories and sales data.  Inventories are an important component of the GDP report because they help distinguish which part of total output produced (GDP) remained unsold.  As a result, this presents us with important clues on the future direction of the economy.  Before computerization allowed companies to trim inventories and use minimal stock on hand, inventory build up was indicative of falling demand and potentially a recession.

Capital Account / Financial Account

Records a nation’s incoming and outgoing investment flows such as payments for entire or parts of companies (direct or portfolio investment), stocks, bonds, bank accounts, real estate and factories.  The balance of payments is influenced by many factors, including the financial and economic climate of other countries.  See Current Account.

Chain Store Sales
The Bank of Tokyo-Mitsubishi/US Warburg U.S. Retail Chain Store Sales Index is one of the longest running chain store indices.  It tracks spending at major chain stores that fit in the "General Merchandise, Apparel and Furniture" category, based on a representative sample of seven (7) large retailers on a weekly basis:

Dayton Hudson (DH)
Federated (FD)
Kmart (KM)

May (MAY)
J.C. Penney (JCP)

Sears (S)
Wal-Mart (WMT)

The Mitsubishi Index includes only "same-store" sales (from stores that have been in business for at least a year).  Because of this, retail industry expansion is not immediately captured in the index, and thus it tends to underestimate sales growth.  Also, due to week-to-week volatility, it has little to say about broader consumption patterns.  The monthly measure of sales is better at predicting the general merchandise and apparel components.

The LJR Redbook Index focuses on Department Stores, a group of 15 companies accounting for roughly 85% of the department store category in the Census Bureau's monthly retail sales report.  As above, the monthly retail sales report has a somewhat better track record for predicting chain store sales.  Chain store sales not only give you a sense of the big picture, but also a sense of the trends among individual retailers and the different store categories.  The release's value is as an early indication of consumer spending, an important macroeconomic indicator.  The index is not itself a macroeconomic indicator.  These indicators have some market importance as they are timely but volatile and are especially interesting during key sales seasons, such as August and December.  Chain Store Sales reports are released at 9:00 (CST) each Tuesday.  The releases are provided to subscribers much earlier and are typically leaked to the rest of the market long before official release times.  Mitsubishi is typically leaked by 7:00 (CST), and the Redbook survey by 13:15 (CST).

Chicago PMI

The Chicago PMI (officially known as the Business Barometer) is a monthly composite index based on opinion surveys of more than 200 Chicago purchasing managers regarding the manufacturing industry. The survey responses are limited to three options: slower, faster and same.  As such, the index will not capture if a component is growing but at a much slower rate or vice versa.  The index is a composite of seven similarly constructed indexes including: new orders, production, supplier delivery times, backlogs, inventories, prices paid, and employment.  New orders and orders backlog indices indicate future production activity.  It signals factory-sector expansion when it is above 50 and contraction when below it. The index is seasonally adjusted for the effects of variations within the year, differences due to holidays and institutional changes.  Because it is an opinion survey, it is often influenced by respondents’ perception of current events, as opposed to actual hard data.  Also, it does not capture technological and production changes, which make it possible for production to expand, while employment contracts.  Because the Chicago PMI is released the day before the ISM, it is watched in order to predict the more important ISM report, which is in itself a good leading indicator of overall economic activity.  It frequently moves markets.  The Chicago PMI is scheduled for release at 9:00 (CST) on the last day of the month, the day before the full ISM report, released by ISM-Chicago.

Construction Spending

Construction spending, also known as construction put in place, reports the dollar value of newly completed structures.  It is the most comprehensive indicator of national construction activity.  Individual data series are available for several building types, including: residential/non-residential, private/public, and other structures, such as roads and utility lines.  This release is used to estimate the contribution of construction to the investment component of the GDP.  Since a building is not recorded in the data series until it is completed, this series is a lagging indicator of construction activity.  Since no square footage reported, it is less useful for gauging overbuilding.  It is also volatile and subject to revision.  Only trends extending over three months or more can be viewed as significant.  Construction Permit issuances, also available from the Bureau of the Census, for residential structures, and proprietary databases of non-residential construction starts are more useful as leading indicators of activity.  The Construction Spending report is scheduled for release at 9:00 (CST) on the first business day of the month (data for two months prior) by the Census Bureau of the Department of Commerce.

Consumer Confidence

This survey measures the level of confidence individual households have in the performance of the economy now and in the future.  It is a leading indicator of future spending and the business cycle.  5000 consumers in the nine census divisions across the country are surveyed each month.  The level of consumer confidence is directly correlated to the strength of consumer spending, which accounts for two-thirds of the economy.  It also correlates closely with joblessness, inflation, and real incomes.  Only index changes of at least five points should be considered significant.  The more confident consumers are about the economy and their own personal finances, the more likely they are to spend.  Note, changes in consumer confidence and retail sales do not move in tandem month by month.  If the economy experiences a long-term expansion, buying intentions may decline even while the jobless rate declines because of the satisfaction of pent-up demand.  Conversely, if inflation begins to accelerate, spending plans may increase for the short-term as consumers buy now to avoid having to pay higher prices later. Regional differences in consumer confidence are an indication of differing business cycles across the nation.  This has implications for spending on durable goods and, more importantly, for residential real estate markets.  Financial markets interpret rising consumer confidence as a precursor to higher consumer spending.  Higher consumer spending could in turn spark inflation.  Look for a change in the direction of the six month moving average of the index.  Consumers do not usually have the necessary information to accurately assess income and job growth six months in the future.  The report provides information on planned spending, which does not necessarily turn into actual spending, although it is unlikely that increasing consumer confidence would be followed by a decline in spending.  The Consumer Confidence survey is not useful for any type of forecasting.  The Consumer Confidence survey is scheduled for released at 9:00 (CST) on the last Tuesday of the month by the Conference Board.

Consumer Credit

Consumer credit represents loans to households for financing consumer purchases of goods and services and for refinancing existing consumer debt.  The main categories of consumer credit are: auto loans, revolving credit, and other.  Auto loans comprise 33% of total consumer credit and revolving loans comprise 42%.  Loans secured by real estate are not included (See Mortgage Applications Survey). Monthly data on consumer installment credit is based on monthly surveys of a sample of commercial banks, consumer finance companies, credit unions, and retail sales.  Changes in consumer credit indicate the state of consumer finances and suggest future spending patterns. Rising levels of consumer credit generally result from an increase in consumer demand.  Because other more timely leading indicators for consumer spending are available, such as consumer confidence and weekly retail sales indices, financial markets do not respond much to this report.  One problem with this indicator is that it measures outstanding loans only; it does not distinguish between new lending and existing loans.  An increase in consumer credit could mean fewer old loans are being paid off while few, if any, new loans are being extended.  Thus, this statistic must be interpreted with other aspects of the economy's performance in mind.  Consumer credit is scheduled for release at 2:00 (CST) every month by the Federal Reserve Board.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services.  It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.  Each month, Bureau of Labor Statistics (BLS) surveys retail establishments throughout the U.S. and gathers price information on thousands of items.  These items are then put into one of the 200 categories and weighed by their importance.  Price change within each category is estimated.  Then these categories are weighted by their importance, and further aggregations are done until an overall CPI number is produced.  Core CPI is less volatile than core PPI and thus is the most widely followed indicator of inflation in the United States.  Financial markets are extremely sensitive to unexpected changes in the index.  As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates accordingly.  The effect ripples across stocks, bonds, and commodities often in a dramatic fashion.  One problem with the CPI is that it handles technological change poorly.  Thus, the CPI can overstate price changes when new technology is introduced.  Also, it doesn't consider the concept of elasticity.  The CPI assumes consumers never adjust their buying habits in the face of rising prices.  Thus, if the price of Granny Smith apples is rising, the CPI assumes consumers will continue buying Granny Smiths and they will not switch to cheaper Red Delicious apples.  This can lead to major distortions between the true rate of inflation and the reported rate of inflation.  Remember, the CPI is an index of price change only.  It does not reflect the changes in buying or consumption patterns consumers probably would make to adjust to relative price changes.  The CPI is scheduled for release at 7:30 (CST) around 15th of the month for previous month's data by the Bureau of Labor Statistics.

Consumer Sentiment Index (University of Michigan)

This survey measures the attitudes and expectations concerning both present and future economic conditions of 500 consumers.  Just like Consumer Confidence, the level of consumer sentiment is directly related to the strength of consumer spending.  It is almost identical, with two subindexes - expectations and current conditions, but has two monthly releases, a preliminary and final reading.  The consumer expectations portion of the Michigan survey is a component of the leading economic indicators index.  Consumer spending accounts for two-thirds of the economy, so the markets follow any indicator relating to consumer behavior and attitudes.  The more confident consumers are about the economy and their own personal finances, the more likely they are to spend.  It is interesting to note that changes in consumer sentiment and retail sales don't move in tandem.  The Preliminary Consumer Sentiment Index (University of Michigan) is scheduled for release at 9:00 (CST) on the second Friday of the month with the  Final Consumer Sentiment Index scheduled for 9:00 (CST) on the fourth Friday of the month by the University of Michigan (to subscribers).

Current Account

The most important part of international trade data.  It is the broadest measure of sales and purchases of goods, services, interest payments and unilateral transfers.  The entire merchandise trade balance is contained in the current account.  See Capital Account

Durable Goods Orders

Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods.  A durable good is defined as a good which lasts an extended period of time (over three years) during which its services are extended.  Data not only provides insight to demand, but also to business investment.  If companies commit to spending more on equipment and other capital, they are obviously experiencing sustainable growth in their business, which sets the stage for greater productive capacity in the country, possibly reducing the prospect for inflation.  Durable Goods Orders are considered a leading indicator of manufacturing activity, and the market often moves on this report despite the volatility and large revisions that make it a less than perfect indicator.  These problems can be minimized by looking at the breakdown of orders.  The total number is often skewed by huge increases in aircraft and defense orders.  An increase based solely on strength in one sector tends to be discounted, while the market is more impressed with broad based increases in all orders.  Also notable in this report is the narrow category of non-defense capital goods.  These goods mirror the GDP category, Producers' Durable Equipment (PDE) -- the largest component of business investment.  Shipments of non-defense capital goods are a good proxy for PDE in the current quarter, while non-defense capital goods orders provide an indication of PDE growth in the quarters ahead.  The Durable Goods Orders report is scheduled for release at 8:30 (ET) around the 26th of the month by the Census Bureau of the Department of Commerce.

Employment Cost Index (ECI)

The Employment Cost Index (ECI) is a comprehensive measure of labor costs.  It measures the total employee compensation costs, including both wages/salaries and benefits for employees in the non farm private sector (about 4,400 sampled) and state and local governments (about 1,000 sampled).  As such, ECI represents the price of labor as compensation per employee-hour worked, during the previous quarter.  The ECI is one way to evaluate wage trends and the risk of wage inflation, as well as possible price pressures.  If wage inflation threatens, it is possible interest rates will rise through market forces (bond prices dropping) or Fed intervention.  Over the business cycle, ECI shows little difference in behavior during recession, recovery and expansion. In fact, it is thought that the ECI is a lagging indicator of economy and inflation.  Since the employment cost index was mentioned by Fed Chairman Greenspan in July 1996, it has risen in importance in the eyes of the bond market.  While it as a less timely indicator of employment cost trends than the monthly hourly earnings data in the employment report, the ECI does add something: an adjustment for shifting employment between industries, and a look at benefit costs. These additions are interesting, but typically do not alter the view of the employment cost picture which was left by hourly earnings.  ECI is less closely watched now that wage inflation is not a serious market concern.  The market focuses on the quarter-to-quarter and year-to-year changes in each of three categories: total employment costs, wages and salaries, and benefit costs.  The figures are sometimes skewed by large year-end bonuses in the financial industry; analysts often exclude the sales commission component of wages and salaries to adjust for this factor.   The Employment Cost Index (http://www.vanessaatkinson.com/spacer.gif) report is scheduled for release at 7:30 (http://www.vanessaatkinson.com/spacer.gif) at the end of first month of every quarter by the Bureau of Labor Statistics.

Employment Report

In the US, the employment report, also known as the labor report, is regarded as the most important among all economic indicators.  The report provides the first comprehensive look at the economy, covering nine economic categories.  Here are the three main components of the report:

1)  Payroll Employment:  Measures the change in number of workers in a given month and measures the number of jobs in more than 500 industries (ex-­farming) in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments.  This release is the most closely watched indicator because of its timeliness, accuracy and its comprehensiveness.  It is important to compare this figure to a monthly moving average (6 or 9 months) to capture a true perspective of the trend in labor market strength.  Equally important are the frequent revisions for the prior months, which are often significant.

2)  Unemployment Rate:  The percentage of the civilian labor force actively looking for employment but unable to find jobs.  Although it is a highly proclaimed figure (due to simplicity of the number and its political implications), the unemployment rate gets relatively less importance in the markets because it is known to be a lagging indicator -- it usually falls behind economic turns.

3)  Average Hourly Earnings Growth:  The growth rate between one month’s average hourly rate and another’s sheds light on wage growth and, hence, assesses the potential of wage-push inflation.  The year-on-year rate is also important in capturing the longer-term trend.

The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working.  These numbers are the best way to gauge the current state and future direction of the economy.  They also provide insight on wage trends and wage inflation.  Fed chairman Alan Greenspan frequently talks about this data.  By tracking the jobs data, investors can sense the degree of tightness in the job market.  If wage inflation threatens, usually interest rates will rise, and bond and stock prices will fall.  One weakness in this indicator is it is subject to significant revisions and large seasonal distortions.  The Employment Report is scheduled for release at 8:30 (ET) on the first Friday of each month by the Bureau of Labor Statistics.

Existing Home Sales

Existing Home Sales is a measure of the selling rate of pre-owned single-family homes, collected by the National Association of Realtors from 650 realtor associations.  It includes a geographical breakdown, as well as a measure of prices and house inventory, the number of months it would take to deplete the existing supply of pre-owned houses at the current sales pace.  The data is timely and is used in conjunction with the new home sales release from the Census Bureau.  Sales of existing (or pre-owned) houses account for roughly 84% of all houses sold.  Sales of new houses account for the other 16%.  Simply, the volume of sales indicates housing demand.  Also, the monthly supply of homes serves as an input into the level of housing pressure.  However, when analyzing sales trends, one must remember to take into account unusual weather and seasonal effects.  This report sometimes moves markets and is considered a good gauge of near-term spending for housing-related items and of consumer spending in general.  The Existing Home Sales report is scheduled for release at 9:00 (CST) on the 25th of every month (or on the first business day thereafter) by the National Association of Realtors.

Factory Orders and Manufacturing Inventories

In many respects this report is a rehash of the durable goods release that became available a week earlier.  The Factory Orders report shows the dollar level of new orders for both durable and nondurable goods.  It consists of the earlier announced Durable Goods report, in addition to new data on nondurable goods orders, and is thus more complete than the Durable Orders report.  Nondurables consist of food and tobacco products, which grow at a fairly consistent monthly rate.  The market also watches this report for revisions to durable orders data, which can be significant.  Currently, durable goods orders are 54% of total orders.  The final piece of new information in this report is factory inventories, the first glimpse at the inventory picture each month (wholesale inventories are typically released a week later, with retail inventories released a few days after wholesale inventories).  Though the inventory figure is not a market-mover, economists use this number to help forecast inventories in the quarterly GDP report.  The Factory Orders report is scheduled for release at 9:00 (CST) around the first business day of the month by the Census Bureau of the Department of Commerce.

FOMC Meeting

The Federal Open Market Committee is a twelve-member committee made up of the seven members of the Board of Governors and five Federal Reserve Bank presidents.  It meets eight times per year to determine the near-term direction of monetary policy, such as setting guidelines for the purchase and sale of government securities and setting policy relating to System operations in the foreign exchange markets.  These changes in monetary policy are now announced immediately after FOMC meetings.  Most importantly, the Fed determines interest rate policy at FOMC meetings.  Market participants speculate about the possibility of an interest rate change at these meetings, and if the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.  The interest rate set by the Fed the federal funds rate serves as a benchmark for all other rates.  A change in the fed funds rate, the lending rate banks charge each other for the use of overnight funds, translates directly through to all other interest rates from Treasury bonds to mortgage loans.  It also changes the dynamics of competition for investor dollars: when bonds yield 10 percent, they will attract more money away from stocks then when they only yield 5 percent.  The level of interest rates affects the economy­ higher rates tend to slow activity; lower rates stimulate activity, a ripple effect that expands into all sectors of the economy.

Gross Domestic Product (GDP)

Gross Domestic Product is a measure of the total production and consumption of goods and services in the U.S.  GDP components like consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's behavior.  There are two complementary measures of GDP: one based on income and one based on expenditures.  Theoretically, these two measures should be equal.  However, due to problems collecting data, there is often a discrepancy.  A deflator is used to convert output measured at current prices into constant-dollar GDP.  This report provides the single most encompassing picture of economic activity available.  It also provides estimates of output based on both demand and supply.  Combined with employment data, GDP gives an important measure of productivity growth.  A big increase in inventories indicates that supply outstripped demand, which has negative implications for future growth.  This data is used to define business cycle peaks and troughs.  Total GDP growth between 2.0% and 2.5% is generally considered to be optimal when the economy is at full employment (unemployment rate between 5.5% and 6.0%).  Higher growth than this leads to accelerating inflation, while lower growth indicates a weak economy.  While GDP is the broadest measure of economic activity, because the data is generally well anticipated, it usually does not move the markets; and because data is released on a quarterly basis, it is not as timely as monthly indicators of economic activity.  Measurement biases of prices probably results in an underestimation of real output growth and productivity, particularly for production of services.  Data is not available regionally.  Gross Domestic Product is scheduled for release at 7:30 (CST) every quarter with monthly revisions by the Bureau of Economic Analysis.

Help-Wanted Index

Help-wanted advertising is a leading indicator of trends in the job market.  The Conference Board constructs the index based on the volume of advertising found in their monthly survey of help-wanted advertising in the same 51 major newspapers across the nation.  An index is created for the nation, the nine census divisions and for the 51 metro areas in which the newspapers are published.  The year 1987 is the base year, with a value of 100.  The index is then seasonally adjusted.  The data supplied is timely and consistent, and a good indicator of future employment trends with a lag of three months.  However, it is only valid for the 51 major metro areas.  It never moves markets.  One problem with this index is that changes in trend may occur because of changes in the way employers advertise and seek out potential employees, rather than because of changes in the job market.  The internet's growing role as a medium for help-wanted advertising may have made the index less reliable.  Another problem is that when comparing the index across regions, one is comparing the volume of help-wanted advertising relative to conditions in 1987 because 1987 was arbitrarily used as the base year for each region.   The Help-Wanted Index report is scheduled for release at 9:00 (CST) on the last Thursday of every month by the Conference Board.

Housing Market Index

The Housing Market Index is data from a survey of home builders reflecting single-family home sales on the present, the next six months and traffic from prospective buyers.  This composite index indicates housing market trends.  This provides a gauge of not only the demand for housing, but consumer sentiment as well.  Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and investments.  Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once a home is sold, it generates revenues for the home builder and the realtor.  It brings a myriad of consumption opportunities for the buyer.  Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase.  The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.  Since the economic backdrop is the most pervasive influence on financial markets, housing construction has a direct bearing on stocks, bonds and commodities.  In a more specific sense, trends in the NAHB housing index carries valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.  The Housing Market Index is scheduled for release at 12:00 (CST) mid-month by the National Association of Home Builders.

Housing Starts/Building Permits

The Housing Starts report measures the number of residential units on which construction is begun each month.  A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing.  It is a seasonally adjusted annualized rate of houses (residential units) started in a given month, taken from a sample of 844 out of 17,000 permit sites.  The monthly national report is broken down by region, and shows the breadth of change.  The regional data is subject to volatility due to weather changes and/or natural disasters.  Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates.  Significant reaction of start/permits to changing interest rates signals interest rates are nearing trough or peak.  To analyze, focus on the percentage change in levels from the previous month.  This indicator becomes important around turning points in the business cycle.  Home builders don't start a house unless they are fairly confident it will sell upon its completion, if not before.  Changes in the rate of housing starts tell us a lot about home demand for homes and construction outlook.  Furthermore, each time a new home is started, construction employment rises, revenues for the home builder and a myriad of other producers also increase; the economic "ripple effect" can be substantial.  The Housing Starts report is scheduled for release at 7:30 (CST) around the 16th of the month by the Census Bureau of the Department of Commerce.

Implicit Deflator

The Implicit Deflator is a measure of the inflationary component of the GDP report.  It reflects price changes between periods and changes in spending patterns.

Import Price Index

The Import Price Index measures prices American consumers pay for imports.  Export Price Index measures prices American producers charge for exports.  Every month, the Bureau of Labor Statistics collects net transaction prices for more than 20,000 products from over 6,000 companies and secondary sources.  These prices are then weighted according to the relative importance and are not seasonally adjusted.  Changes in import and export prices gauge inflation here and abroad.  Inflation leads to higher interest rates, and the bond market is especially sensitive to the risk of importing inflation because it erodes the value of the principal paid back when the bond matures.  Inflation also decreases the value of the steady stream of interest rate payments on this type of security.  Since imports make up roughly 15% of the goods purchased in the U.S., changes in import prices impacts inflation.  In addition, prices of imports affect the profitability of U.S. firms competing with the cheaper or more expensive imports.  Export prices are an indicator of the demand for U.S. goods abroad, and thus provide information about economic conditions abroad.  One drawback is this index assumes a fixed market basket of goods.  This index currently uses 1995 as the base year.  Thus, each category of goods is assumed to make up the same percentage of expenditures as it did in 1995.  This can lead to distortions between the true price change and the reported price change.  Another problem is Import and Export Prices are directly influenced by exchange rate fluctuations with a lag created by advance orders contracts.  This makes interpretation of these indices more complex.  The Import Price Index is scheduled for release at 7:30 (CST) around the 12th of the every month by the Bureau of Labor Statistics.

Index of Leading Economic Indicators (LEI)

The LEI is a composite of 10 different indicators, designed to predict future aggregate economic activity. The Index usually reaches peaks and troughs earlier than the overall economic cycle, which makes it an important tool for forecasting and planning.  The LEI’s individual components are selected from various sectors of the economy, including manufacturing, building, financial, retail and consumer variables.  The components were chosen because of their economic relevance and statistical adequacy.  They are weighted equally to provide a net contribution to the composite index.  The specific leading indicators – selected from various sectors of the economy – include the following: the average work week, weekly jobless claims, manufacturers’ new orders for consumer goods and materials, vendor performance, contracts and orders for new plant and equipment, building permits, stock prices (S&P500), interest rate spread of 10-year Treasury note minus federal funds rate, money supply (M2), and consumer expectations index.  Markets rarely react to the LEI.

Industrial Production and Capacity Utilization

The official name is the Federal Reserve Statistical Release G.17.  It is a chain-weighted measure of the change in the production of the nation's factories, mines and utilities as well as a measure of their industrial capacity and the extent available resources among factories, utilities and mines are being used (commonly known as capacity utilization).  These measures refer to output, or the physical quantity of items produced, unlike sales value which combines quantity and price; it is expressed as a percentage of real output.  The level of industrial production divided by the level of industrial capacity equals the capacity utilization rate.  The manufacturing sector accounts for one-quarter of the economy.  The capacity utilization rate provides an estimate of how much factory capacity is in use.  If the utilization rate climbs too high (above 85%) it can lead to inflationary bottlenecks in production.  The Federal Reserve watches this report closely and decides how to set interest rates on the basis of whether production constraints are threatening to cause inflation.  As such, the bond market can be highly sensitive to this report.  Changes in capacity utilization can also be used (cautiously) as an indication of changing producer prices.  This indicator is timely, important and frequently moves markets; it is considered a key factory-sector gauge.  Capacity utilization is considered a telling inflation indicator.  Industrial Production and Capacity Utilization is scheduled for release at 8:15 (CST) around the 15th of every month by the Federal Reserve Board.

Institute for Supply Management (Formerly the National Association of Purchasing Managers)

The Institute for Supply Management (ISM), releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders.  It is divided into manufacturing and non-manufacturing sub-indices.  Survey responses reflect change, if any, from the current month to the previous month, the percentage reporting each response, the net difference between the number of responses in positive/ negative economic direction, and the diffusion index.  The Manufacturing ISM is based on data compiled from monthly replies to questions asked of purchasing and supply executives in over 400 industrial companies, weighted by each industry's contribution to GDP.  Twenty industries from various U.S. geographical areas are represented.  The Non-Manufacturing ISM is based on data from more than 370 purchasing and supply executives in over 62 different industries.  Financial markets are extremely sensitive to unexpected changes in this index.  ISM is perceived as a good indicator of inflationary pressures.  Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets.  More than one of the ISM sub-indexes provides insight into commodity prices and clues regarding the potential for developing inflation.  The Federal Reserve keeps a close watch on this report in determining the direction of interest rates when inflation signals appear.  As a result, the bond market is highly sensitive to this report.  Turning points in the composite index suggest either a slowing or acceleration in the nation's economic activity.  Change in prices paid by manufacturers is indicative of accelerating or decelerating inflation.  Growth in new orders will predict manufacturing activity in future months.  Readings above 50% indicate an expanding factory sector.  An index value above 43.9 over a period of time generally indicates an expansion of the overall economy.  Note:  The index does not capture technological change and production efficiencies, which make it possible for production to expand, while employment contracts.   The National Association of Purchasing Managers, now called the Institute for Supply Management (ISM) is scheduled for release at 9:00 (CST) at the beginning of the month by the National Association of Purchasing Managers (Institute for Supply Management).

International Trade

International Trade measures the difference in quantity between imports and exports of both tangible goods and services.  Imports indicate demand for foreign goods and services here in the U.S., while exports show the demand for U.S. goods in overseas countries.  Merchandise data are provided for U.S. total foreign trade with all nations, detail for trade with particular nations and regions of the world, as well as for individual commodities.  Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. Furthermore, the data can directly impact all the financial markets, but especially the foreign exchange value of the dollar.  The dollar can be particularly sensitive to changes in the chronic trade deficit run by the U.S., since this trade imbalance creates greater demand for foreign currencies.  The bond market is also sensitive to the risk of importing inflation.  Because this report breaks down the trade with major countries it can be instructive for investors who are interested in diversifying globally.  For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.  Nevertheless, International Trade hardly ever moves markets.  It is very dated, but it does provide clues about net exports in the following GDP release.  International Trade is scheduled for release at 7:30 (CST) around the 19th of every month and is released jointly by the Commerce Department and the Bureau of Economic Analysis.

Jobless Claims (Initial)

Initial jobless claims measure the number of people (non industry-specific) filing first-time claims for state unemployment insurance.  This report provides a timely, but often misleading, indicator of the direction of the economy, with changes in claims potentially signaling changes in job growth.  It is assumed the stronger the job market, the greater the spending power, the healthier the economy.  Weekly claims are volatile and data can be skewed by holidays; therefore, many analysts track a four week moving average of data to get a better sense of the underlying trend in claims.  It typically takes a sustained move of at least 30,000 in claims to signal a meaningful change in job growth.  Unemployment claims can fall to such a low level that businesses have a tough time finding new workers.  This puts wage pressures on the economy, leading to wage inflation, which is bad news for the stock and bond markets.  If wage inflation threatens, it's a good bet interest rates will rise and bond and stock prices will fall.  This report is timely and occasionally moves the market.  Although volatile and subject to big revisions, it is considered a good gauge of labor market conditions and an indicator of the employment report.  The Initial Jobless Claims report is scheduled for release at 7:30 (CST) every Thursday by the Employment and Training Administration of the Department of Labor.

Money Supply

The monetary aggregates (M1 ,M2 and M3) measure money supply by degree of liquidity.  M1, M2, and M3 are progressively more inclusive measures:  M1 is included in M2, which is included in M3.  M1, consists of currency and checkable deposits.  The non-M1 components of M2 are household savings deposits, time deposits, and retail money market mutual funds.  The non-M2 components of M3 consist of institutional money funds and certain managed liabilities of depositories, namely large time deposits, repurchase agreements and Eurodollars.  Changes in the monetary aggregates indicate the thrust of monetary policy as well as the outlook for economic activity and inflationary pressures.  Currently, the various money supply measures are not followed by market participants because today, monetary policy is understood more clearly by the level of the federal funds rate.  To the extent money supply is still followed, M2 is the favored monetary aggregate.  The Fed still targets both M2 and M3 but if the Fed misses its target, it is more likely to change the target than it is to change policy.  However, with M2 velocity behaving more predictably since 1994, some Fed policy makers are once again watching M2. Intermediate and long term trends should therefore be noted, but volatile weekly swings are of little consequence to the market.  The Money Supply report is scheduled for release at 3:30 (CST) every Thursday by the Federal Reserve.

Mortgage Applications Survey

This survey tracks the number of applications for mortgages to: (1) purchase new homes and (2) refinance an existing mortgage.  The base period is 100 = March 16, 1990.  The survey covers approximately 40 percent of all U.S. retail residential mortgage originations and has been conducted weekly since 1990.  Respondents include mortgage bankers, commercial banks and thrifts.  Data is adjusted for seasonal and holiday effects.  It provides very timely information on the single-family housing market, as well as homeowners’ loan type preferences under different interest rate environments.  The refinancing index is used in many personal consumption forecasts; a rising index could suggest consumers are obtaining extra cash for spending or for paying down debt.  The purchase index is also used in many housing forecasts.  Since most homebuyers need to apply for mortgages prior to purchase, the index leads home sales and thus is an early gauge of economic strength.  The mortgage application survey is volatile and can occasionally move markets.  The Mortgage Applications Survey report is scheduled for release at 6:00 (CST) every Wednesday by the Mortgage Bankers Association (MBA).

National Association of Purchasing Managers (NAPM)/ Institute for Supply Management

The National Association of Purchasing Managers, now called the Institute for Supply Management (ISM), releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders.  It is divided into manufacturing and non-manufacturing sub-indices.  Survey responses reflect change, if any, from the current month to the previous month, the percentage reporting each response, the net difference between the number of responses in positive/ negative economic direction, and the diffusion index.  The Manufacturing ISM is based on data compiled from monthly replies to questions asked of purchasing and supply executives in over 400 industrial companies, weighted by each industry's contribution to GDP.  Twenty industries from various U.S. geographical areas are represented.  The Non-Manufacturing ISM is based on data from more than 370 purchasing and supply executives in over 62 different industries.  Financial markets are extremely sensitive to unexpected changes in this index.  ISM is perceived as a good indicator of inflationary pressures.  Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets.  More than one of the ISM sub-indexes provides insight into commodity prices and clues regarding the potential for developing inflation.  The Federal Reserve keeps a close watch on this report in determining the direction of interest rates when inflation signals appear.  As a result, the bond market is highly sensitive to this report.  Turning points in the composite index suggest either a slowing or acceleration in the nation's economic activity.  Change in prices paid by manufacturers is indicative of accelerating or decelerating inflation.  Growth in new orders will predict manufacturing activity in future months.  Readings above 50% indicate an expanding factory sector.  An index value above 43.9 over a period of time generally indicates an expansion of the overall economy.  Note:  The index does not capture technological change and production efficiencies, which make it possible for production to expand, while employment contracts.   The National Association of Purchasing Managers, now called the Institute for Supply Management (ISM) is scheduled for release at 9:00 (CST) at the beginning of the month by the National Association of Purchasing Managers (Institute for Supply Management).

New Home Sales

The New Home Sales report shows the number of newly constructed homes with a committed sale during the month.  It is compiled through nationwide survey of 10,000 builders/owners of 15,000 building projects and through sampling of permit-issuing offices, as well as land not covered by building permits.  The data is timely and is used in conjunction with the existing home sales release from the National Association of Realtors.  The level of new home sales indicates housing market trends, and economic momentum signaling consumer purchases of furniture and appliances.  Simply, the volume of sales indicates housing demand.  Also, the monthly supply of homes serves as an input into the level of housing pressure. However, when analyzing sales trends, one must remember to take into account unusual weather and seasonal effects.  The New Home Sales report is scheduled for release at 9:00 (CST) at the end of every month by the Census Bureau.

Personal Income and Personal Consumption Expenditures (PCE)

Personal Spending, also known as PCE, represents the change in the market value of all goods and services purchased by individuals. It is the largest component of GDP. Personal income represents the change in compensation that individuals receive from all sources including: wages and salaries; proprietors’ income; income from rents; dividends and interest; and transfer payments (Social Security, unemployment, and welfare benefits). The release of these two figures gives you the savings rate, which is the difference between disposable income (personal income minus taxes) and consumption, divided by disposable income. The ever-declining savings rate has become a key indicator to watch as it signals consumer spending patterns.  Personal income is the dollar value of income received from all sources by individuals from employment, self-employment, investments, and transfer payments, in the form of wages, social security, unemployment and stock dividends.  It also includes small amounts for expenses of non-profit organizations and income of certain fiduciary activities.  The largest component of personal income is wages and salaries from employment.  Personal income is released after the employment report and thus can already be estimated by the payroll and earnings data.  Thus, income releases generally do not shed much additional light on current conditions.  Personal consumption expenditures include consumer purchases of durable and non-durable goods and services.  It is the only source of data on the consumption of services, which make up a large share of total consumer spending.  Changes in durables spending tend to be very volatile.  Because consumption expenditures can be estimated by the retail sales data previously released, there are few surprises except for services expenditures (59% of consumer spending) not covered.  The consumption expenditures part of this report is even more directly tied to the economy.  Consumer spending accounts for two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed.  Personal income is not very important to financial markets but trends in personal income growth can indicate future consumer spending patterns.  A falling saving rate may reflect an imbalance between income and spending growth, signaling a potential problem with consumer credit quality.  Prolonged weakness in expenditure growth indicates a reduction in consumer demand.  This will lead to a weaker economy, and potentially a recession, since consumer spending makes up 68% of GDP.  These reports have some significance; it attained a somewhat higher profile in February 2000 when the FOMC began forecasting inflation in terms of the personal consumption expenditures deflator -- a component of the report -- instead of the timelier CPI.  Also, the report also includes a measure of the personal saving rate.  The Personal Income and Personal Consumption Expenditures (PCE) report is scheduled for release at 7:30 (CST) on the first business day of the month by the Commerce Department.

Producer Price Index (PPI)

The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector of the average price level for a fixed basket of capital and consumer goods paid by producers.  It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output.  The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.  Over 10,000 PPI's for individual products and groups of products are released each month.  New PPI's are gradually being introduced for the products of industries in the transportation, utilities, trade, finance, and services sectors of the economy.  PPI contrasts with other measures, such as the Consumer Price Index (CPI), that measure price change from the purchaser's perspective.  Sellers' and purchasers' prices may differ due to government subsidies, sales and excise taxes, and distribution costs.  Inflation at this producer level often gets passed through to the consumer price index (CPI).  By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.  The Federal Reserve employs this data in formulating fiscal and monetary policies.  The Producer Price Index (PPI) report is scheduled for release at 7:30 (CST) on the second Thursday or Friday of each month by the Bureau of Labor Statistics.

Productivity

The productivity and associated cost measures describe the relationship between real output and the labor and capital inputs involved in production.  Productivity measures the growth of labor efficiency in producing the economy's goods and services and is defined as the ratio of output to input.  Unit labor costs reflect labor costs of producing each unit of output and provide information on emerging wage pressures.  Both are followed as indicators of future inflationary trends.  Output is represented by the Gross Product of business sectors, and input is represented by the corresponding labor hours.  This report provides the best overall picture of the economy's efficiency.  But, because components of the index are published in other releases, the information is frequently anticipated and thus does not influence the markets to a great extent.  Also, because the data is released quarterly, it is not as timely as other monthly indicators.  The productivity report is scheduled for release at 7:30 (CST) one month after each quarter by the Bureau of Labor Statistics.

Purchasing Managers’ Index (PMI)

The Index is widely used by industrialized economies to assess business confidence. Germany, Japan and the UK use PMI surveys for both manufacturing and services industries.  The numbers are arrived at through a series of questions regarding Business activity, New Business, Employment, Input Prices, Prices Charged and Business Expectations.  In addition to the headline figures, the prices paid components is highly scrutinized by the markets for evaluating pricing power and inflationary risks. Also see Institute for Supply Management (ISM) or National Association of Purchasing Managers (NAPM).

Retail Sales

The retail sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation.  It is the most timely indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences.  Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise.  Excluded are sales taxes collected directly from the customer.  It also excludes spending for services, a large component of consumer expenditures.  Retail sales is a the first picture of consumer spending for a given month.  Retail sales are often viewed ex-autos, as auto sales can move sharply from month-to-month.  Also, gas and food component changes are often a result of price changes rather than shifting consumer demand.  Retail sales can be quite volatile and the advance reports are subject to large revisions.  Data is revised three months back every month and can be substantial.  Every April, data is revised to incorporate annual survey information and new seasonal factors.  Comprehensive benchmark revisions take place once every five years with the release of the Census of Retail Trade.  Note:  Data is in nominal terms, thus changes in sales figures may reflect changes in price and not changes in consumer demand.  This is especially true for the gas and food components.  The retail sales report is scheduled for release at 7:30 (CST) around the 13th of every month by the Census Bureau of the Department of Commerce.

Wholesale Trade

Wholesale Trade is the dollar value of sales made and of inventories held by merchant wholesalers.  It is one of the components of business inventories.  Statistics include sales, inventories, and stock/sale ratios, collected via mail-out/mail-back survey of about 7,100 selected wholesale firms.  Data is both seasonally adjusted and unadjusted.  Firms are first stratified by merchant wholesale sales, inventories and major kind of business (determined from the latest census of wholesale trade).  All firms with wholesale sales or inventories above applicable size cutoffs for each major kind of business are included in the survey.  The sample is updated every quarter to reflect "births" and "deaths," adding new employer businesses identified in the business and professional classification survey and dropping companies that are no longer active wholesalers.  Wholesale trade inventories and the inventories-to-sales ratio are important and timely indicators of current consumption, and of future manufacturing activity.  However, because it is a survey, sampling errors are probable and the interpretation of questions can lead to inaccurate results.  Also, the annual benchmark can change long term interpretation of inventory trends.  Monthly wholesale trade, sales and inventories reports are released six weeks after the close of the reference month.  They contain preliminary current month figures and final figures for the previous month.  The Wholesale Trade report is scheduled for release at 9:00 (CST), mid-month by the Bureau of the Census.