Reading signs of financial times to come

March 1, 2005

Economic indicators can certainly impact investment decisions and the financial markets.

Getting a pulse Economists and market research analysts use various economic indicators to get a pulse on economic trends. There is much debate about which indicators are actually relevant. Some economists claim that certain indicators are more important than others during certain points in the economic cycle and less important at other times.

Despite the ongoing debate, economic indicators can certainly impact investment decisions and the financial markets. The key is to understand the differences among the indicators that can ultimately impact potential investment decisions.

The U.S. Department of Commerce's Bureau of Economic Analysis releases GDP figures in three different phases. The "advance estimate" is reported late in the first month after the end of the calendar quarter. Two further revisions, the "preliminary report" and "final report"are subsequently released over the next two months.

The consumer price index (CPI) measures the price changes of items used by Americans on a daily basis. The monthly measurement focuses on the change in prices of a fixed "market basket" of various goods and services assembled from eight major groups: housing, food and beverages, transportation, medical care, apparel, recreation, education and communication and other miscellaneous goods and services.

Accurate inflation guide The U.S. Department of Labor's Bureau of Labor Statistics releases the CPI every month. The Bureau reports how much the market basket of goods and services costs each month, and then compares that figure to the price of the same goods and services in a prior period. Since the CPI provides the most accurate gauge on inflation, the Fed uses it as a guide in setting monetary policy.

Inflation affects bond yields as well as the cost of living, both of which can have an impact on economic growth. If inflation rises quickly, interest rates may rise sharply. Wages don't always keep pace with inflation, causing a reduction in purchasing power, which ultimately can slow the economy. Many economists feel that seasonal factors can cause extreme price fluctuations, particularly with food and energy. They contend that it is more important to focus on the "core" CPI, which excludes these two volatile components.

The producer price index (PPI) measures price changes at the earliest level, from the producer's perspective. The PPI consists of a group of indices that measure the average change in selling prices received by U.S. producers of goods and services. It includes price movements for almost every goods-producing sector: agriculture, forestry, fisheries, mining, scrap and manufacturing. It recently added a category of non-goods-producing sectors such as transportation, real estate and legal services.

First measure of inflation The Bureau of Labor Statistics releases the figures during the second week of each month, making it the first measure of inflation every month. While most economists look at producer prices to help them forecast what will happen to consumer prices, the relationship between the PPI and the CPI is not always that simple. While the PPI can sometimes provide an early read on the CPI, producer price increases are not always passed on to the consumer. Again, many economists prefer to focus on the "core" PPI data, removing the volatile and seasonal impact of the food and energy components.

Housing starts Housing starts report the number of new residential single and multifamily construction projects on which building has actually begun. The U.S. Department of Commerce's U.S. Census Bureau figures are released two to three weeks after the end of the referenced month.

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