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FUNDAMENTAL ECONOMIC INDICATORS ARE ESSENTIAL FOR PREDICTING FOREIGN EXCHANGE (FOREX/FX) CURRENCY MARKET PRICE ACTION

By Larry Litchfield for Forexmentor.com
©2007, Currex Investment Services Inc.

Jan. 13, 2007

Following are descriptions and definitions of some of the more important economic indicators mentioned in Part Two of this article. They are useful for currency traders desiring to better understand price movements. Indicators are described in italics and when applicable followed by a formal definition. All of the indicators can have either a high or medium impact on price movement. The FMOC Meeting (Discount Rate) is the most widely watched indicator and has the most significant impact on currency prices.

A detailed explanation of all the indicators in Part Two would be far too lengthy for this article. Therefore, for those readers interested in learning more it is recommended that you do a Google Search on those indicators of interest to you. An excellent source for detailed current information is the Dismal Scientist at http://www.dismal.com. They also have a two week trial priod for a paid monthly subscription that provides exceptional information.

Some other sources are:

http://www.federalreserve.gov/fomc/default.htm

http://www.uschamber.com/publications/weekly/outlook/default

Consumer Price Index (CPI): The rate of change of the CPI is one of the key measures of inflation for the U.S. economy. Acceleration or deceleration of inflation may signal that a change in monetary policy may be appropriate .

Definition: An index designed to measure the change in price of a fixed market basket of goods and services. The market basket of goods and services is representative of the purchases of a typical urban consumer. The index is intended to measure pure price change only; attempts are made to remove changes in price resulting from changes in quality.

Source: U.S. Department of Labor; Bureau of Labor Statistics

Frequency: Monthly

Availability: Generally available the second week of the month immediately following the month for which data is being released; always released after the Producer Price Index.

Gross Domestic Product (GDP): The Federal Reserve's primary goal is sustained growth of the economy with full employment and stable prices. Real GDP is the most comprehensive measure of the performance of the U.S. economy. By monitoring trends in the overall growth rate as well as the unemployment rate and the rate of inflation, policy makers are able to assess whether the current stance of monetary policy is consistent with that primary goal .

Definition: The total value of goods and services produced within the borders of the United States, regardless of who owns the assets or the nationality of the labor used in producing that output. (In contrast, Gross National Product (GNP) measures the output of the citizens of the US and the income from assets owned by US entities, regardless of where located.) The growth of output is measured in real terms; meaning increases in output due to inflation have been removed.

Source: US Department of Commerce; Bureau of Economic Analysis

Frequency: Quarterly

Availability: Data are typically released during the final week of the month. The first or advance estimate is released during the final week of the month immediately following the end of a calendar quarter.

Housing Starts: Housing is perhaps the most interest-rate sensitive sector of the economy. It often experiences large swings in activity in response to changes in the level of long-term interest rates such as those on mortgages. While residential investment represents just four percent of the level of GDP, due to its volatility it frequently represents a much higher proportion of changes in GDP over relatively short periods of time. Policy makers monitor the housing sector very carefully for clues about the near-term performance of the economy and for the effects of changes in financial conditions.

Definition: An estimate of the number of housing units on which construction was started. Starting construction is defined as excavation for the footings or foundation, or the first shovel of dirt to break ground. (In response to natural disasters such as Hurricane Andrew in August of 1992, that definition has been expanded to a housing unit built on an existing foundation after the previous structure had been completely destroyed.) Housing starts are divided into single-family and multifamily (2+) units. Beginning construction on a 100-unit apartment building, for example, is counted as 100 starts.

Source: U.S. Department of Commerce; Bureau of the Census

Frequency: Monthly

Availability: Around 15th of the month for the immediately preceding month.

Nonfarm Payroll Employment: Growth of employment and hours worked provide important information about the current and likely future pace of overall economic growth. Trends in average hourly earnings provide information about supply and demand conditions in labor markets, which may provide signals about the overall level of resource utilization in the economy.

Definition: An estimate of the number of payroll jobs at all nonfarm business establishments and government agencies. Information is also provided on the average number of hours worked per week and average hourly and weekly earnings.

Source: U.S. Department of Labor; Bureau of Labor Statistics

Frequency: Monthly

Availability: Usually the first Friday of the month for the immediately preceding month; occasionally released on the second Friday.

Industrial Production/Capacity Utilization: While the industrial sector of the economy represents only about 20 percent of GDP, because changes in GDP are heavily concentrated in the industrial sector changes in this index provide useful information on the current growth of GDP. The level of capacity utilization in the industrial sector provides information on the overall level of resource utilization in the economy, which may in turn provide information on the likely future course of inflation.

Definition: An estimate of the total sales of goods by all retail establishments in the U.S. (Sales of services are not included.) Data are presented in nominal, or current, dollars, meaning they are not adjusted for inflation. However, the data are adjusted for seasonal, holiday, and trading-day differences between the months of the year. Sales are categorized by type of establishment, not by type of good.

Source: U.S. Department of Commerce, Bureau of the Census

Frequency: Monthly

Availability: Advance estimate released during the second week of the month for the immediately preceding month .

Retail Sales: Personal consumption expenditures (PCE) represent roughly two-thirds of GDP. By monitoring retail sales, policy makers are able to make an assessment of the likely growth of PCE for the current and future quarters.

Definition: An estimate of the total sales of goods by all retail establishments in the U.S. (Sales of services are not included.) Data are presented in nominal, or current, dollars, meaning they are not adjusted for inflation. However, the data are adjusted for seasonal, holiday, and trading-day differences between the months of the year. Sales are categorized by type of establishment, not by type of good.

Source: U.S. Department of Commerce, Bureau of the Census

Frequency: Monthly

Availability: Advance estimate released during the second week of the month for the immediately preceding month.

Business Sales and Inventories: This release is the primary source of data on inventories. The rate of inventory accumulation plays a key role in determining the current pace of economic growth and often provides useful clues about the future pace of growth as well. For example, if inventories are accumulating at a rapid pace, such that inventory sales ratios are rising, it may portend a slowing of growth in the near future as firms cut production to bring inventories back into line with sales. Vice versa, if inventories are growing slowly or actually falling, it may signal a future pickup in production.

Definition: Total current-dollar sales and inventories for the manufacturing, wholesale, and retail sectors of the economy.

Source: U.S. Department of Commerce; Bureau of the Census

Frequency: Monthly

Availability: About six weeks from the end of the month; for example, data for June are reported in mid August.

Durable Goods: The data in this report provide information on the strength of demand, from both domestic and foreign sources, for U.S. manufactured durable goods. Rising orders, shipments, and unfilled orders suggest demand is strengthening, which will likely result in increasing production and employment, while falling orders, shipments, and unfilled orders suggest the opposite. Data in this release also provides information on the current and likely future pace of business investment in new equipment .

Definition: Data on shipments, new orders, and unfilled orders, expressed in current dollars, for things such as primary metals, fabricated metals, electric generating equipment, non-electrical machinery, information processing equipment, and transportation equipment, including civilian and military aircraft and ships, light-, medium-, and heavy-duty trucks, and automobiles.

Source: U.S. Department of Commerce; Bureau of the Census

Frequency: Monthly

Availability: Fourth week of the month for the immediately preceding month.

Purchasing Managers Index (PMI): The National Association of Purchasing Managers (NAPM), 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.

Producer Price Index (PPI): The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The PPI most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.

Proceed to Part IV: Guidelines, Hints and Observations

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