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6,359 posts
msg #43054
Ignore TheRumpledOne
4/19/2006 12:57:32 AM

Understanding Economic Indicators
By Dan Carter

Being a well-versed investor does not come easy. Economic terms and figures are thrown around all the

time on the news and in financial magazines, but they are not always easy to understand.

Often, you may feel like you need a master's degree in economics to get to the root of what these

indicators mean. To help clear the air, here is the lowdown on seven important economic indicators.

With this knowledge, you'll understand the national economy and make wiser personal investments.

what is an economic indicator?

A general term, economic indicators encompass any calculation that relates to, well, the economy. There

are indicators for employment, income, international trade, and even transportation. Analysts study

these figures and measure trends, comparing statistics from the month before, the last quarter or any

relevant time period.

The numbers, obtained through simple or complex methods depending on the indicator, paint a picture of

the strength of a nation's economy. Of course, they are not meant to stand alone -- they require some

logical interpretation as well.

7 economic indicators

1- Real Disposable Personal Income

What does the indicator measure?
Let me break down this term section by section. First, personal income is simply all income earned by

U.S. inhabitants from any source. Disposable personal income represents income after taxes are


Finally, adding "real" to the indicator means two things:

A- Disposable income is divided by the U.S. population (making it a per capita measurement)
B- Disposable income is then adjusted for inflation.

Therefore, real disposable personal income measures how much money each American has on hand for

consumption and savings.

How often is it updated?
Figures for this indicator are released on a monthly basis by the Department of Commerce.

How can you apply this information?
A positive percentage change means that there is a general increase in a country's standard of living,

since there is more disposable income available. Countries with rising populations must have a greater

increase in real income in order to accommodate new citizens. Therefore, look for fractional increases

in real disposable personal income as a good sign, but keep in mind that this figure tends to follow

the business cycle. It rises in a time of economic growth and descends during a recession.

2- Beige Book

What does the indicator measure?
Though not a big influence market-wise, the descriptive statistic nicknamed the "Beige Book" is still

very relevant. It compiles subjective information on the latest economic conditions from the point of

view of the Federal Reserve Banks. Thus, after glancing at the Beige Book, investors would know the

strength of the economy in general terms and the confidence many bigwigs have in its future. The

findings are also divided by economic sector, so you can analyze specific domains as well.

How often is it updated?
There are eight publications throughout the year, but the dates change on a yearly basis.

How can you apply this information?
The Beige Book plays a role when the details outline surprising results. When this happens, the market

fluctuates and affects investments. However, with so many annual versions, surprises are not frequent.

On a more general basis, the Beige Book forecasts what the Federal Reserve Board will do with interest

rates. The Federal Open Market Committee receives this book before interest rate meetings and often

uses it as a reference. Therefore, if rates change, the reasons are often seen in the Beige Book. Those

looking to borrow money should take a look at the book, published online at

On to the CCI and the GDP... Next >>

3- Consumer Confidence Index (CCI)

What does the indicator measure?
Unique among economic indicators, the CCI's findings are in survey form and, like the Beige Book, are

based on opinions, not concrete numbers.

Conducted by the Conference Board, a sample of 5,000 American households answer questions on current

business conditions, the job market and confidence in the economy. When the results are released, the

index is whittled down to a number. There are subdivisions as well, as the Conference Board provides an

"Expectations Index" for a preview of future trends, and a "Present Situation Index."

How often is it updated?
The CCI is released every month, based on the previous month's survey. However, it is best to look at

it over long periods of time.

How can you apply this information?
Often, there is a correlation between an increase in the index over six months and a rise in job

creation, higher wages and low interest rates. The CCI is therefore very relevant. Since it projects

Americans' views on the economy, the Federal Reserve often uses it to decide whether to hike or lower

interest rates. Also, the index results are separated by region, giving consumers a good idea of what

the real estate market is like in their area.

4- Gross Domestic Product (GDP)

What does the indicator measure?
GDP is one of the most important economic indicators, representing the dollar value of all goods and

services produced by an economy over a certain time. It takes into account consumption, trade,

government purchases, and investments, among others. To get one figure that best demonstrates the

economic health of a country, look at the GDP.

How often is it updated?
Advance reports of the GDP are released at the end of every quarter, but the most accurate figures are

put out annually.

How can you apply this information?
Market expectations are compared to the GDP when it is released, and if the difference between the two

is favorable, stock prices can rise. Investors should look at the "current dollars GDP" for the market

value of goods and services, while the "real GDP" uses constant dollars in order to provide a benchmark

for previous years' results. Economists often consider a growth rate between 2.5% and 3% to be healthy,

and market performance usually increases when the GDP falls in this range.

5- Standard & Poor's Index (S&P 500)

What does the indicator measure?
The S&P 500 is now considered the true gauge of the U.S. stock market. As the name suggests, the index

includes 500 different stocks selected for their market size, liquidity and diversity. With this large

sample, the S&P 500 covers most areas of the U.S. economy. The figures you see on CNN are calculated by

giving each stock in the index a proportional representation, according to the dollar value of all

outstanding shares.

How often is it updated?
Every second after the market bell rings, the S&P 500 is subject to change.

How can you apply this information?
Since the S&P is such a good indicator of the stock market, investors should always have their eye on

its fluctuations. When the index rises above the 1,000 mark, this is a sign of recovery as consumers

reinvest in top stocks.

Learn more about how inflation works and what consumer behavior is all about... Next >>

6- Consumer Price Index (CPI)

What does the indicator measure?
When it comes to inflation, the CPI is your index. It represents the price of goods and services that

are commonly used -- everything from rent expenses to the cost of milk is included.

The CPI reflects the efficacy of government policy and is divided into two categories:

A- The CPI-U is for urban consumers
B- The CPI-W is for hourly wage earners and clerical workers.

Together, typical purchases for the majority of the U.S. population are taken into account.

How often is it updated?
The CPI is updated monthly and is released around the 15th of the following month.

How can you apply this information?
Interpreting this index is fairly simple. A rising rate means inflation, but economists usually

consider an annual 1% or 2% change acceptable. Anything higher means there has been significant

inflation and as a result, consumers' purchasing power decreases. The Federal Reserve will also raise

short-term interest rates to discourage market activity. When analyzing the CPI, look for the "core

rate" because it excludes volatile costs like energy to provide a better picture of inflation.

7- Michigan Consumer Sentiment Index (MCSI)

What does the indicator measure?
Similar to the CCI, the MCSI uses surveys to conduct its research. A sample of 500 U.S. households is

used, compared to 5,000 for the CCI. Experts at the University of Michigan came up with the formula for

this index, and now it's widely used to demonstrate consumers' willingness to spend.

How often is it updated?
Preliminary reports are released on the 10th day of each month and final, more precise, reports are

released on the first of the following month.

How can you apply this information?
The index extrapolates on people's views on the economy and their opinions concerning spending and

jobs. Therefore, reading the index roughly indicates how much spending will take place over the next

month and, consequently, the effects this will have on the economy, employment and even interest rates.

indicate this

With these indices, rates and ratios safely secured in your brain, you will be better prepared to

interpret economic issues. Coupled with regular research, these economic indicators are great for

investors and guys who are simply interested in the economy.

Resources: - Beige Book - CCI - GDP - S&P 500 - CPI

1,373 posts
msg #43066
Ignore EWZuber
4/19/2006 3:59:03 PM

It's JMO, but I think spending time trying to decipher economic numbers and indicators is a waste of time for market players. Time is better spent reading the charts. News related to your particular stock can be helpful but the economy is too complex for anyone to predict. You can ask 10 economist about the state of the economy and get a different answer from each one. Which one do you believe?
Besides that it requires you to then form an opinion. What if your opinion is in conflict with what the charts are telling you? This will impact your ability to read the charts without bias. I read people on Raging Bull always trying to predict the market with economic fundamentals and I have yet to see it work. According to them the market is 'wrong' and should crash any minute now and they have been saying that for over a year.

17 posts
msg #43083
Ignore johnp
4/20/2006 1:12:40 PM


What? Do you want information to make you a better trader, or do you want to disregard any possible valuable information because others can't make heads of what it means in another context. I see not conflict of interest forming opinions based primarily on charts and incorporating big picture data into determining targets and stops.

1,373 posts
msg #43173
Ignore EWZuber
4/24/2006 4:02:21 AM

johnp, IMO, for the most part opinions are your enemy. They get in the way of making an unbiased read of the charts, which is essential and as I stated, few people ever agree on what the state of the economny is and even fewer agree on where it is going. How can one use such nebulous information to trade on? IMO, can't be done.
For every 'expert' that claims the economy is robust I bet I can find another that says it is sick and on life support.

283 posts
msg #43176
Ignore heypa
4/24/2006 11:56:09 AM

There isn't a single government statistic that hasn't been gimicked to mislead the gullible public.. I don't believe any of them.You are better off not reacting to any of them.Stick to your charts and use your stops or better yet put no more than 5% in any position with no more than 10% total in the market at any one time , watch your positions and get out when doubt rears its ugly head and sleep easy.
As always the devil is in the details.. Live long and prosper.
P.S. What I said above applys to all financial data also. It's there to manipulate you also so stick to your chart reading!

1,373 posts
msg #43183
Ignore EWZuber
4/24/2006 9:19:38 PM

Government statistics are typically revised a month, two or three months later anyhow.
Government accounting does not even get close to GAAP standards and there are disclaimers in government figures that tell you that it can not be made accurate because of the enormity of it and lack of accountability.

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