Economic Indicators

Economic Indicators and Definitions

To understand the role that fundamental analysis plays in planning a winning trading strategy, I want you grasp the importance of macroeconomics and how they play out as trading indicators.

Macroeconomics is defined as, “The branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity”. This covers areas such as national interest rates, unemployment, housing, monetary policies and GDP estimates to name a few. In short, the term “macroeconomics” covers all factors that affect the movement of world currencies. Macroeconomic facts and figures are released frequently to the public via economic calendars.

As a trader, the economic calendar is one of your most efficient tools for planning a strategy for trading currency pairs in both traditional forex and binary options format. It is a concise overview of how well a country (and therefore their currency) is doing, enabling you to successfully predict its movement.

There are many unique factors or economic indicators to take into account when considering a currency based trade – see below.

A Helpful List of Primary Economic Indicators

    • Non-Farm Payrolls – A measure of paid employment within the USA. This number will exclude farm workers, all employees in private households and non-profit organisations. This information is included in the “Jobs Report”, typically released on the first Friday of each month.
    • Trade Balance or Balance of Trade (BOT) – This refers to the calculation of a country’s exports, minus its imports. This figure is released monthly, usually on the second and third week of each month depending on the country concerned.
    • Trade Deficit/Trade Surplus – “Trade Deficit” describes the amount by which a country’s imported goods and merchandise exceed the value of its exports. The term “Trade Surplus” refers to a country’s imported goods and services being lower in value than its exports.These figures are usually released on the 10th day of each month.
    • Consumer Price Index (CPI) – This is the benchmark measure of the standard of living in a country. The CPI figure is a comparison of the cost of thousands of everyday goods and products (excluding food and energy), with the cost of the same list of items on the same date and time from the previous year. This offers a clear indication of inflation, helping traders to estimate currency trends.These figures are released around the 15th day of each month for most countries.
    • Manufacturing ISM Report & Purchasing Managers Index (PMI) – The Institute for Supply Management (ISM), uses the Purchasing Managers Index (PMI) as a measure for the manufacturing sector. PMI is based on five items: employment environment, production, inventory, orders and deliveries.Using a benchmark figure of 50, it is also a very straightforward system to understand. A PMI of less than 50 shows that the sector is shrinking, a PMI of over 50 on the other hand, shows growth. A PMI of 50 therefore demonstrates that the sector has had no change since the previous report was published.These figures are usually released on the first official business day of each month.
    • Michigan Consumer Sentiment Index (MCSI) – Each month the University of Michigan conducts a survey that measures the level of consumer expectations on the US economy. A preliminary report is then released around the second week of each month, with strong indication of the full results. The full report is released on the first of the following month. This is a highly useful tool for currency traders as it indicates if consumers are spending.
    • Gross Domestic Product (GDP) – A country’s economic health and standard of living is the measure of Gross Domestic Product (GDP), and this is one of the most important indicators that a trader can learn to understand. The GDP report measures the monetary value of all goods and services, both produced and supplied by a country, within a specified period of time. This is by far the most followed trade indicator, used by investors, analysts and economists alike, aggregating its data from a number of other sources discussed here.GDP reports are compiled quarterly, but an annual percentage based overview is also made available for each calendar year.
    • The Durable Goods Report – Durable good are defined as higher priced goods with a shelf life of three years or more. Examples include: motor vehicles, furniture, consumer electronics and jewellery. Durable Goods tend to be expensive and their purchase indicates that consumer spending is increasing. This also hints towards production increase and may mean industrial and economic growth. Similarly, a fall in the demand of Durable Goods may indicate an economy and industry on the decline. Traders can use the results of this report to help assess the strength of a currency.The report is released around the 20th day of each month and shows results from the previous month.
    • Producer Price Index (PPI) – This is a measure of the average changes in prices received by domestic producers for their finished goods, and provides a very good indication of inflation. This report does not take into account the services sector, measuring only the price of actual goods.The PPI report is released monthly, usually around the 15th day of each month.
    • Unemployment Rate – The unemployment rate is shown as a percentage of the available workforce that is currently unemployed. It is measured by comparing the number of unemployed seeking work, versus the total number of people in the workforce. Currency traders should pay attention to unemployment rate changes as these can be an indicator of changes in the underlying economic conditions of a country.Unemployment rate data is released on the 10th day of each month.
    • Building Permits – A regulatory body must grant a permit before new and existing buildings may be legally constructed or worked upon. These are only granted when there is a demand for homes, therefore they can be seen as an indicator of the future state of an economy. Building also leads to employment and the purchasing of materials, which are also indicators of an economy heading towards growth.The US provides this information on the third Tuesday of each month.
    • Industrial Production (IP) – The IP reports covers several different industries in the US, including factories, utilities and mines. This report gives a complete overview and accurate account of the growth and resource indicators of each area. It can therefore be used to estimate “Capacity Utilisation Ratios” for each sector.Changes to the levels of these indicators usually reflect similar changes in overall economic activity, which in turn may affect the GDP of a country. For example, the industry benchmark is 100% as defined in 2002. Anything above 82% can mean high demand and may hint toward supply shortages in the future. In stark contrast, a ratio lower than just 80% can hint towards an economy on the decline with recessions and unemployment. It’s worth noting the IP ratio rarely exceeds 85%. This report is released on or around the 16th of each month.
    • Housing Starts – The Housing Starts report gives information on how many new residential constructions have begun, how many have been completed and how many permits were issued in per month. This is seen to be a highly accurate indication of a country’s economic strength, and therefore its currency. Traders can compare the monthly report with data from the same time period in the previous year to understand the growth trends of a country and its economy.This report is compiled on or around the 17th day of each month.

These economic indicators and more, can be located easily on our own economic calendar. The relevant currency pairs can then be traded through our featured Forex and Binary Options broker websites. Traders should always research any variables that may affect a currency before trading to maximise their chances of success.