Q&A WITH MARK SPRAGUE
Mark Sprague is a noted and respected expert on the real estate industry and the Austin market, in particular. He is also the Director of Business Development for Mission Mortgage and we are fortunate to have access to his expertise and opinions. Previously, Mark provided some insight into Leading Economic Indicators (click here to see the previous post). Today, Mark provides information about Coincident Economic Indicators.
Every week there are a variety of economic indicators released to help gauge the health and direction of the market. With so many numbers and so much information, it is sometimes difficult to know what to watch and why. The media has a habit of reporting the figures without much explanation of the bigger picture, which would help their readers to understand the numbers they read.
Question: With so many economic indicators, what should we watch and what do they mean?
Answer: Generally, economic indicators fall into three categories – Leading Indicators, Coincident Indicators, and Lagging Indicators. Today, let’s take a look at Coincident Indicators.
Coincident indicators show economic changes occurring right now. Examples:
Gross Domestic Product – the value, expressed in dollars, of all goods and services produced in the nation in a specific year. The GDP reflects the final value of all output in the US economy within a certain period, usually annual output.
Market sensitivity – medium to high
Release time: 8:30 AM ET Released the final week of January, April, July and October.
Frequency: Quarterly (monthly revisions tend to be moderate, though they can on occasion be more substantial)
Source: Bureau of Economic Analysis, Commerce Dept.
Why is it important – GDP: They are the best known initials in economics and stand for Gross Domestic Product. This is the big one, the mother of all economic indicators and the most important statistic to come out any given quarter. The GDP is a must read for economists and many others, because it is the best overall barometer of the economy’s ups and downs. It is analyzed carefully for hints on where the economy is headed. CEOs and corporate boards use it to help compose business plans, make hiring decisions, and forecast sales growth as well as acquisitions. White House and Federal Reserve officials view the GDP as a report card on how well or poorly their policies are working. For these and other reasons, the quarterly GDP report is of the most anticipated (the ideal GDP growth rate is neither fast enough to cause inflation nor slow enough to cause recession. Most economists agree that the ideal GDP growth rate is in the range of 2-3%).
The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country’s economy. It represents the total dollar value of all goods and services produced over a specific time period – you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year. Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total. The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.
As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It’s not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.
Nonfarm Employment – the total number of wage and salary earners working in business, industry and government.
Market Sensitivity – Very High
Release time: 8:30 AM ET, generally announced on the first Friday of each month and covers the month just concluded.
Source: Bureau of Labor statistics, Dept of Labor
Why is it important – This is the big one! No single economic indicator can jolt the stock and bond markets as much as the jobs report. The reason? To begin with, the employment news is very timely. Its released just a week after the end of the month being reviewed. Second, the report is rich in detail about the job market and household earnings, information that can help forecast future economic activity. Third, lets face it…we’re talking about the well being of American workers. Wages and salaries from employment make up the main source of household income. The more workers earn the more they buy and propel the economy forward.
If fewer people are working, spending drops off, and businesses suffer. Because household spending accounts for 70%+ of the national (US) economies total output, you can see why the investment community and the Federal Reserve pay such close attention to the employment reports. The job numbers often contain surprises, since it is computed from payroll as well as household it contains a tremendous amount of economic information in one report.