Bloomberg Market Concepts

Economic Indicators

The Primacy of GDP

● Main measure of economic activity

● World GDP: 8% compounded annual growth over 50 years

● How accurately do GDP statistics portray the economy?

○ Inaccurately because the scope of GDP measurements can change

● Economic growth is cyclical, with series of booms and busts

● Investors interpret economy through economic indicators

● Leading indicators attract the most investor interest

Economic statistics

Essential Economic Indicators

● Economic growth

○ Gross domestic product

○ Market value of all final goods and services in a country

○ GDP = C + I + G + (X-M)

○ C = personal consumption

○ I = private investments

○ G= gov consumptions

○ X = exports

○ M = imports

○ Different countries have different emphasis on GDP (example: in America

personal consumption makes up most of GDP, while in China it is Private

investment)

○ Important: percentage change in GDP from one year to the next

○ Nominal GDP - inflation = Real GDP Growth

○ Real GDP growth: only production, taken out inflation effects

○ Recession: 2 successive quarters of negative real GDP growth

● Inflation

○ Erodes value of bonds

○ General increase in prices of goods and services

○ Decreases purchasing power of money

○ Sources of inflation data: quarterly GDP report, monthly CPI

○ CPI needs to be fully representative of consumer spending

○ Inflation basket

○ What was a representative basket yesterday may not be representative today

● Unemployment

○ Consumer spending based on salaries

○ Economy shrinks when unemployment rises

○ GDP growth is depressed when unemployment rises

● Business confidence

○ Business consumers make more investments when they feel confident there will

be a demand for their goods and services in the future

○ ISM: gauges business confidence

○ Above 50: optimism

○ Below 50: pessimism

○ PMI and GDP move together

○ PMI is best leading economic indicator

● Housing

○ Housing starts → house building

○ Buying new house = buying new products as well

○ Housing starts against real gdp growth → there is a relationship

Monitoring GDP

● World economic indicators → US

● Check monthly: PMI, nonfarm payrolls (unemployment report), housing, inflation, CPI (in

that order)

● Check if actual is better than surveyed

● First inkling comes from PMI

○ This will tell us about US business confidence

● GDP is released every quarter

○ 1st quarter: end of April

● GDP often fails to surprise because other indicators give hints

● GDP estimation by govs is time-consuming, activity

● GDP arrives too late to be useful to investors

● Instead, glean GDP growth through related indicators

● The indicators that are released first attract the most attention

Forecasting GDP

● Analysts forecast key economic indicators

● Long-term economic estimates are foundational to financial markets

● Changes in estimates illustrates economic optimism and pessimism

● Significant changes may herald an economic turning point

● Investors compile many indicators, rather than one, to predict turning points

● Turning points

● Investment banks create estimates of economic indicators to know when specific

economic data points are a positive or negative surprise

● Economic surprise monitor

○ Surprise moves markets