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When making trading decisions, traders often speculate about the health of countries’ economies – particularly in the Forex market.
In order to have an understanding of an economy’s ‘fundamentals’, one needs to look at how productive and vibrant the different sectors of the economy are. This involves looking at data on manufacturing, retail sales, housing construction and sales, consumer spending and confidence, and the status of the labour market. Data on these different sectors can be found in reports released by government agencies, academic institutions, and private firms.
Gross Domestic Product is one of the major economic indicators that generally reflect the state of the economy of the whole country. GDP measures an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. In particular, the GDP is the market value of all final goods and services produced within a country in a given period of time. The formula used to compute GDP is: GDP= Consumption spending + Investment spending + Government spending + Imports and Exports. GDP does not discriminate between those goods and services made by the people of that country or by foreigners. As long as the goods and services are made within that country’s borders, it counts towards the GDP.
GNP is the total income earned by a nation’s permanent residents. Whereas GDP is the total of all final goods and services made within an economy, GNP measures the goods and services made by a nation’s residents throughout the world. If a Japanese car company opens a plant in Michigan, the value of the cars made and the money spent on investment, will count towards US GDP but also to Japanese GNP as they own the capital and profits. GNP and GDP are released every quarter, but preliminary measures come out in between those releases. The formula for GNP differs from GDP by including income that US citizens earn abroad and excluding income that foreigners earn within the US.
Consumers primarily use these goods. New Durable Goods Orders measures the strength of manufacturing because durable goods are designed to last three years or more. These goods can include airplanes, machine parts for factories, cars and buses, cranes, appliances, etc… Since this fundamental indicator measures new orders, it will be an indication of how actual production will perform in the near future. Production firms will have to make the durable goods to fill all the new orders. New orders directly affect the level of both unfilled orders and inventories that firms monitor when making production decisions. The Conference Board attempts to take into account inflation when measuring. In the US, New Durable Goods Orders data uses price indexes constructed from various sources at the industry level and a chain-weighted aggregate price index formula to try and ‘deflate’ the results.
The retail sales indicator is released on a monthly basis and is important to the foreign exchange trader because it shows the overall strength of consumer spending and the success of retail stores. Retail Sales impart information on the economy because it measures the amount of shopping consumers are doing. If the consumers have enough income to purchase goods at stores, then more merchandise will be produced or imported. Retail Sales is a ‘seasonal’ indicator, meaning that during certain months retail sales are always expected to be up, for example September (when kids are going back to school) and December (the holiday season). The Retail Sales indicator is particularly important in the US, where all business is aimed toward the consumer.
The housing sector is an important part of any economy, and figures about home construction, sales and prices are used as indicators of economic performance
These indicators measure the vitality of an economy’s housing sector. Building Permits, Construction Spending, and Housing Starts show respectively how many new homes are being planned to be constructed, how much construction is currently happening, and how many new homes have finished being built. New and Existing Home Sales show how the housing market is doing. If people are buying more homes, that means they have more money, and therefore the economy is doing better. When homes sales fall, the economy can weaken because housing is such a big sector. There are other indicators that deal with housing such as the change of prices of homes. Home price data is usually released side by side with home sales data.
The stock market of a country reflects the price movements and value of a country’s biggest company’s and firms. Increases (or decreases) of a stock index can reflect both the general sentiments of investors and the movements of interest rates.
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