Every week, dozens of economic surveys and indicators are released and reported on in the business news. In fact, there are so many - and the data often makes such small moves - that it can be easy to overlook the importance of this data on the markets. However, as an educated investor, it's important to keep your finger on the pulse of the economy, and indicators are an important way to do that. This article will examine some of the most important economic and market indicators for investors to monitor. Get to know them, and you'll be better prepared to anticipate and react to future market developments.
Tutorial: Economic Indicators

Employment
Perhaps the most important indicator of the health of the economy is employment. On the first Friday of each month, the U.S. Bureau of Labor and Statistics releases its monthly unemployment report and nonfarm payroll; these indicate the current unemployment rate and how many jobs have been gained or lost by the U.S. economy, respectively. Market participants eagerly await these reports, and they often result in some of the biggest one-day movements in both bond and stock markets. The employee situation report also influences other important indicators, such as consumer confidence and consumer sentiment.

Because consumers make up nearly 70% of U.S. economic activity, the state of the labor market is of paramount importance to the overall well-being of the economy. This means that a weakening or strengthening labor market can influence the economy. For example, a weakening labor market often translates into lower corporate profits. The basic premise is that when people are out of work, they cannot buy homes or make the necessary purchases that drive corporate profits. (To learn more about the unemployment rate, see The Unemployment Rate: Get Real.)

Inflation
The mandate of the Federal Reserve is to promote economic growth and price stability in the economy. Price stability is measured as the rate of change in inflation, so market participants eagerly monitor monthly inflation reports in order to determine the future course of Federal Reserve monetary policy.

There are many indicators of inflation, but perhaps most widely known is the Consumer Price Index, or CPI. The CPI measures the change in consumer prices and theoretically determines to what extent life is getting more expensive for the average consumer. Another important measure is the Producer Price Index, or PPI. PPI fluctuations measure the rate of change in inflation for producer goods; if these prices increase substantially, it is more likely that companies will eventually pass the price increases along to consumers. Many economists and market participants prefer to analyze both CPI and PPI without the impact of food and energy, as these industries are known to be very volatile.

Market participants also keep track of the price of key commodities such as oil. Since oil is such a key component of economic activity around the globe, its price is worth paying special attention to. Increases in the price of oil can sometimes have offsetting effects. However, higher oil prices can lead to higher prices for a wide variety of goods because oil is part of many materials as well as a determinate in the cost of transporting goods waiting to be sold. (For more on inflation and the economy, see The Importance Of Inflation And GDP.)

Inflation is a useful metric of corporate valuation because the discount rate to perform discounted cash flow analysis factors is the rate of inflation. Higher inflation corresponds with a high discount rate and subsequently lower project value. On the other hand, deflation is also dangerous because decreased revenue means future layoffs for firms that cannot maintain their full workforce.

Consumer Activity
Changes in the activity level of consumers have a direct impact on corporate profits and the level of stock prices. There are several ways of measuring consumer activity. (What people buy and where they shop can provide valuable information about the economy. To learn more, see Using Consumer Spending As A Market Indicator.)

One of the most popular ways is to measure consumer confidence. There are several measures of consumer confidence; all are designed to determine how consumers feel about their economic prospects in the coming months. The theory is that when consumers feel more confident, they are more likely to spend; conversely, they are less likely to spend when they feel less confident. Also, because markets are forward looking, there is a tendency for stock prices to reflect the future opinions of consumers today. Another measure of the consumer is retail sales. While consumer confidence is forward looking, retail sales indicators reveal historic shopping patterns. (For more insight, read Understanding The Consumer Confidence Index.)

The housing market serves as another vital economic indicator. Although housing is highly localized and difficult to measure on a national basis, there are several indicators that do a reasonable job. Market participants pay attention to monthly releases such as housing starts, building permits and new home sales in order to get a reading on the level of activity in the housing market. Market watchers also monitor price changes through a variety of indicators such as the S&P/Case-Shiller Home Price Index which monitors home price changes in 20 large American cities. By synthesizing a variety of housing reports, market participants can deduce whether or not people are willing to make large purchases.

Investor Activity
In addition to economic indicators, market participants focus closely on measures of investor activity for market clues. Despite popular belief, the best time to invest is not when everyone is bullish but instead when most investors are bearish. If everyone else is bullish, there is no one left to buy and drive prices higher - but this does, of course, depend on your investment strategy. Therefore, readings of investor sentiment are important. A variety of indicators are available. Some are published by large investment firms or research firms, which periodically poll their clients to determine market consensus.

As overseas investors have become increasingly important participants in the U.S. financial markets, measures of their activities have garnered more attention. One of the most closely watched reports focuses the purchase of U.S. Treasuries by foreign central banks. When central banks are buying more Treasuries, interest rates often head lower – when rates are lower, stock prices tend to move higher. The reverse – less buying, higher interest rates and depressed stock prices – also tends to hold true.

Other important market indicators include advance/decline ratios and the number of new highs and new lows in the market. These readings indicate how healthy the overall stock market is and can provide confirmation as to the "quality" of a stock market advance or decline.

The Bottom Line
Knowing what economic and market indicators move markets is only half the battle; the real trick is interpreting the indicators and determining their likely market impact. In addition to the absolute level of an indicator, two other important factors to consider are the trend in the indicator and the market's expectation for that indicator. Taken together, these often determine the market's reaction to a given economic or market report. Learning to anticipate the market's reaction to various indicators requires careful monitoring of financial markets as well as experience interpreting these reports. As with most aspects of investing, hard work and persistence will help an investor determine the likely reaction to economic and market data. (To learn more about indicators, check out Leading Economic Indicators Predict Market Trends.)

Related Articles
  1. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  2. Economics

    The Problem With Today’s Headline Economic Data

    Headwinds have kept the U.S. growth more moderate than in the past–including leverage levels and an aging population—and the latest GDP revisions prove it.
  3. Economics

    Explaining the Participation Rate

    The participation rate is the percentage of civilians who are either employed or unemployed and looking for a job.
  4. Economics

    What Qualifies as Full Employment?

    Full employment is an economic term describing a situation where all available labor resources are being utilized to their highest extent.
  5. Fundamental Analysis

    Is India the Next Emerging Markets Superstar?

    With a shift towards manufacturing and services, India could be the next emerging market superstar. Here, we provide a detailed breakdown of its GDP.
  6. Forex Education

    These Are The Best Hours To Trade the British Pound

    The best times to trade the British pound are centered around economic releases at 1:30 am, 2:00 am, 8:30 am and 10:00 am U.S. ET.
  7. Investing News

    Timing of the Fed Interest Rates Hike

    Until the beginning of August, Fed watchers expected the central bank to raise rates in September. However, recent news pertaining to China’s slowing economy and its devaluation of the yuan have ...
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  9. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  10. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
RELATED TERMS
  1. Monetary Policy

    The actions of a central bank, currency board or other regulatory ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Cost, Insurance and Freight - CIF

    A trade term requiring the seller to arrange for the carriage ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of standardizing ...
  6. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
RELATED FAQS
  1. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  2. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>
  3. How is the Federal Reserve audited?

    Contrary to conventional wisdom, the Federal Reserve is extensively audited. Politicians on the left and right of a populist ... Read Full Answer >>
  4. Who decides when to print money in the US?

    The U.S. Treasury decides to print money in the United States as it owns and operates printing presses. However, the Federal ... Read Full Answer >>
  5. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  6. Why do some people claim the Federal Reserve is unconstitutional?

    The U.S. Constitution does not mention the need for a central bank, nor does it explicitly grant the government the power ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!