Top 5 Economic Indicators for Global Investors
Five Economic Indicators to Improve Your Investing
Investing and economics tend to go hand-in-hand, which means it's extremely important for international investors to know basic economic indicators. From gross domestic products ("GDPs") to consumer price indices ("CPIs"), there are a number of data points that can help global investors predict changes in a country's economy and strategically adjust their portfolio.
For example, suppose that an international investors has generated healthy returns over the past several years from Brazilian equities. An investor that tracks the consumer price index ("CPI") may notice that inflation is rising, which means that the central bank may decide to hike interest rates. Knowing that interest rate hikes tend to hurt equities, the investor may reduce their holdings.
In this article, we'll take a look at the five most important economic indicators that every international investor should know and how to use them in the field.
#1: Gross Domestic Product
Gross domestic product ("GDP") represents the market value of all final goods and services produced within a country during a given period. The figure is usually given in nominal and real formats, with real GDP adjusting for changes in monetary value. Given its vast breadth, this indicator is among the most watched by the financial markets.
The expansion of a country's GDP is indicative of a growing economy, while a contraction in GDP indicates a slowdown in a country's economy. Meanwhile, a country's projected GDP growth rate can be used to determine an appropriate level of sovereign debt or determine if companies operating within the country are likely to experience growth.
#2: Employment Indicators
The productivity and wealth of a country's citizens is arguably the ultimate determiner of economic success. Employment indicators, such as labor force, payroll and unemployment data, estimates how many citizens are employed, as well as income trends (e.g. whether they are making more of less money than before).
The financial markets carefully watch these employment indicators, especially in developed countries that generate most of their income from domestic consumer spending. A fall in employment is often proceeded by a fall in consumer spending, which can hurt GDP statistics and overall economic growth prospects.
#3: Consumer Price Index
The consumer price index ("CPI") measures changes in the prices of consumer goods and services that are purchased by households. The index is a statistical estimate created using prices from a sample of representative items collected periodically. Often times, this measures is used as a gauge of inflation, which can positively or negatively affect a country's currency.
The financial markets carefully watch CPI figures for signs of inflation. Rising inflation can lead to higher interest rates and reduced lending, while deflation can lead to lower interest rates and greater lending, when it comes to central bank policy. But without these policies, inflation can actually erode a currency's relative valuation and help exports (and vice versa).
#4: Central Bank Minutes
Central banks create monetary policy and exert significant control over a country's economy. Consequently, the financial markets tend to listen closely to every word that central bankers utter publicly for clues about the future. Central bank minutes are formal releases that contain valuable economic commentary that can signal future policy action.
In the U.S., the Federal Reserve issues what's called the "beige book", which contains anecdotal information on current economic conditions by each Federal Reserve Bank. Similar notes are released by many other central banks, including the Bank of Japan, European Central Bank (ECB), and others, on a regular or semi-regular schedule.
#5: PMI Manufacturing & Services
The Purchasing Manager's Index ("PMI") is an economic indicator developed by Markit Group and the Institute for Supply Management. By polling businesses on a monthly basis, the index reflects purchasing managers' acquisition of goods and services. The two most important surveys are the PMI Manufacturing and PMI Services indices.
The financial markets watch the PMI Manufacturing and PMI Services indices as key leading economic indicators. After all, companies stop purchasing raw materials immediately when demand dries up, much before other reports like retail sales or consumer spending would indicate any problems in an economy.
Key Takeaway Points
- International investors should familiarize themselves with basic economic indicators in order to alert themselves of potential opportunities or threats in their portfolio.
- The five most important economic indicators include, GDP, CPI, employment indicators, central bank minutes, and PMI data.
- These economic indicators should only be used as a starting point for further research.