Working with statistics
The trade balance is a measure of the
difference between imports and exports of tangible goods and services.
The level of the trade balance and changes in exports and imports are widely
followed by foreign exchange markets.
The trade balance is a major indicator of
foreign exchange trends. Seen in isolation, measures of imports and exports are
important indicators of overall economic activity in the economy.
It is often of interest to examine the trend
growth rates for exports and imports separately. Trends in export activities
reflect the competitive position of the country in question, but also the
strength of economic activity abroad. Trends in import activity reflect the
strength of domestic economic activity.
Typically, a nation that runs a substantial trade balance deficit has a weak
currency due to the continued commercial selling of the currency. This can,
however, be offset by financial investment flows for extended periods of time.
The Gross Domestic Product (GDP) is the
broadest measure of aggregate economic activity available. Reported quarterly,
GDP growth is widely followed as the primary indicator of the strength of
economic activity.
GDP represents the total value of a country's
production during the period and consists of the purchases of domestically
produced goods and services by individuals, businesses, foreigners and the
government.
As GDP reports are often subject to substantial
quarter-to-quarter volatility and revisions, it is preferable to follow the
indicator on a year-to-year basis. It can be valuable to follow the trend rate
of growth in each of the major categories of GDP to determine the strengths and
weaknesses in the economy.
A high GDP figure is often associated with the
expectations of higher interest rates, which is frequently positive, at least in
the short term, for the currency involved, unless expectations of increased
inflation pressure is concurrently undermining confidence in the currency.
The Consumer Price Index (CPI) is a measure of
the average level of prices of a fixed basket of goods and services purchased by
consumers. The monthly reported changes in CPI are widely followed as an
inflation indicator.
The CPI is a primary inflation indicator
because consumer spending accounts for nearly two-thirds of economic activity.
Often, the CPI is followed but excludes the price of food and energy as these
items are generally much more volatile than the rest of the CPI and can obscure
the more important underlying trend.
Rising consumer price inflation is normally
associated with the expectation of higher short term interest rates and may
therefore be supportive for a currency in the short term. Nevertheless, a longer
term inflation problem will eventually undermine confidence in the currency and
weakness will follow.
The Producer Price Index (PPI) is a measure of
the average level of prices of a fixed basket of goods received in primary
markets by producers. The monthly PPI reports are widely followed as an
indication of commodity inflation.
The PPI is considered important because it
accounts for price changes throughout the manufacturing sector.
The PPI is often followed but excludes the food
and energy components as these items are normally much more volatile than the
rest of the PPI and can therefore obscure the more important underlying trend.
Studying the PPI allows consideration of
inflationary pressures that may be accumulating or receding, but have not yet
filtered through to the finished goods prices.
A rising PPI is normally expected to lead to
higher consumer price inflation and thereby to potentially higher short-term
interest rates. Higher rates will often have a short term positive impact on a
currency, although significant inflationary pressure will often lead to an
undermining of the confidence in the currency involved.
Payroll employment is a measure of the number
of people being paid as employees by non-farm business establishments and units
of government. Monthly changes in payroll employment reflect the net number of
new jobs created or lost during the month and changes are widely followed as an
important indicator of economic activity.
Payroll employment is one of the primary monthly indicators of aggregate
economic activity because it encompasses every major sector of the economy. It
is also useful to examine trends in job creation in several industry categories
because the aggregate data can mask significant deviations in underlying
industry trends.
Large increases in payroll employment are seen
as signs of strong economic activity that could eventually lead to higher
interest rates that are supportive of the currency at least in the short term.
If, however, inflationary pressures are seen as building, this may undermine the
longer term confidence in the currency.
Durable Goods Orders are a measure of the new
orders placed with domestic manufacturers for immediate and future delivery of
factory hard goods. Monthly percent changes reflect the rate of change of such
orders.
Levels of, and changes in, durable goods order
are widely followed as an indicator of factory sector momentum.
Durable Goods Orders are a major indicator of manufacturing sector trends
because most industrial production is done to order. Often, the indicator is
followed but excludes Defence and Transportation orders because these are
generally much more volatile than the rest of the orders and can obscure the
more important underlying trend.
Durable Goods Orders are measured in nominal
terms and therefore include the effects of inflation. Therefore the Durable
Goods Orders should be compared to the trend growth rate in PPI to arrive at the
real, inflation-adjusted Durable Goods Orders.
Rising Durable Goods Orders are normally
associated with stronger economic activity and can therefore lead to higher
short-term interest rates that are often supportive to a currency at least in
the short term.
Retail Sales are a measure of the total
receipts of retail stores. Monthly percentage changes reflect the rate of change
of such sales and are widely followed as an indicator of consumer spending.
Retails Sales are a major indicator of consumer
spending because they account for nearly one-half of total consumer spending and
approximately one-third of aggregate economic activity.
Often, Retail Sales are followed less auto
sales because these are generally much more volatile than the rest of the Retail
Sales and can therefore obscure the more important underlying trend.
Retail Sales are measured in nominal terms and
therefore include the effects of inflation. Rising Retail Sales are often
associated with a strong economy and therefore an expectation of higher
short-term interest rates that are often supportive to a currency at least in
the short term.
Housing Starts are a measure of the number of
residential units on which construction is begun each month and the level of
housing starts is widely followed as an indicator of residential construction
activity.
The indicator is followed to assess the
commitment of builders to new construction activity. High construction activity
is usually associated with increased economic activity and confidence, and is
therefore considered a harbinger of higher short-term interest rates that can be
supportive of the involved currency at least in the short term.
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