What Are the Key Macroeconomic Indicators to Watch?

What Are the Key Macroeconomic Indicators to Watch?

Reading time: 7 minutes

In fundamental analysis, macroeconomic indicators are critical. These datasets provide insights into the state of the economy and help traders and investors forecast where the nation’s respective markets, whether currency, stocks, or bonds, may be headed.

From unemployment data and GDP to consumer confidence and building permits, these key economic indicators aren’t just watched by traders; policymakers, central banks, businesses, and more follow them to gauge the economy’s next move.

Economic indicators can be broadly categorised into lagging and leading indicators. Simply, lagging indicators show past performance and help corroborate current economic activity, while leading indicators help predict future economic movement.

1. Gross Domestic Product (GDP)

  • GDP: The total monetary value of all final goods and services produced within a country's borders over a specific time frame, typically a year or quarter.

Economists refer to the GDP growth rate when discussing economic expansion or contraction. A rising GDP indicates economic growth, often seen alongside improved company earnings and positive sentiment. Meanwhile, declining GDP signifies economic contraction and potentially even a recession, discouraging investment and often forcing central banks to step in to buoy the economy.

2. Labour Market Indicators

  • Unemployment Rate: The percentage of the labour force that is jobless but actively seeking employment.
  • Non-Farm Payrolls (NFPs): A US-only metric measuring the monthly change in the number of jobs added to the economy, excluding the farming sector.

High unemployment is a key lagging indicator of economic distress. Economic activity declines alongside weaker consumer spending, which can negatively impact GDP growth and drive financial markets lower.

Conversely, solid NFP figures show strength in the job market, often sparking bullish sentiment amongst traders. However, a strong labour market may also lead to interest rate hikes from the US Federal Reserve since the restricted supply of labour forces wages up and drives inflation.

3. Inflation Indicators

  • Consumer Price Index (CPI): The average change over time in the price level consumers pay for goods and services.
  • Producer Price Index (PPI): The average change in selling prices received by domestic producers for their output.

Inflation indicators shed light on purchasing power, the cost of living, and potential monetary policy shifts by central banks. The CPI and PPI are expressed in nominal and real terms (the latter excludes volatile components such as energy and food prices), with the inflation rate measuring the percentage change in these indicators over a specified period, typically monthly and yearly. Generally speaking, rising inflation leads to interest rate hikes and vice versa.

4. Central Bank Interest Rates

  • Interest Rate: The rate at which central banks lend money to domestic financial institutions.

Central bank rates are used to steer the economy when it’s overheating or declining. A rate hike makes borrowing more expensive and encourages saving, decreasing the flow of money in the economy and cooling inflation. Conversely, rate cuts make borrowing cheaper, encouraging spending and investment during economic downturns.

Rising interest rates often drive a nation’s currency higher but decrease company earnings and can consequently send stock prices lower.

5. Balance of Trade

  • Trade Balance: The difference between the value of a country's total exports and imports.

A positive trade balance (a trade surplus) suggests strong demand for a nation’s goods and services in the global economy and signals economic strength. However, a persistent negative trade balance (a trade deficit) can indicate heavy reliance on foreign products, meaning its economy is more vulnerable to external shocks.

A trade surplus often underpins a country’s currency due to increased demand, while a deficit can have the opposite effect.

6. Consumer Behaviour Indicators

  • Consumer Confidence: A measure of consumers’ outlook on present and future economic conditions.
  • Retail Sales: The total sales from retail stores over a given period, usually released in monthly and yearly terms.

Strong consumer confidence is a leading indicator that generally precedes increased spending and economic growth. Declining confidence is a sign of discouraged spending and investment.

Meanwhile, retail sales offer a real-time view of consumer spending and are a barometer of current economic momentum.

Both provide insight into how consumers feel about their economic prospects, which can influence market sentiment.

7. Industrial Indicators

  • Inventories: Stock of goods that a company has yet to sell.
  • Industrial Production: Measures the total output of factories, mines, and utilities.
  • PMIs (Purchasing Managers’ Indexes): An index of the prevailing direction of economic trends in manufacturing and services derived through surveys.

Industrial production, a significant source of economic growth, can be a powerful indicator of economic health. For instance, rising inventories may indicate slowing sales, while rising PMIs suggest industry growth and confidence amongst purchasing managers.

Trends in all three of the noted metrics can affect traders’ perspectives on an economy and its potential, influencing currency and stock market valuations.

Final Thoughts

In summary, many macroeconomic factors influence financial markets. While GDP, employment data, inflation, and interest rates are pivotal, the importance of a given indicator varies based on a nation and its economic conditions; it is context-dependent.

Ultimately, economic indicators are small pieces in the overall economic picture. By seeking to understand what drives these interconnections, you will be able to gain a comprehensive picture of an economy and its markets.

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