In the previous section ("Fundamental Analysis.") I explained the usage of Alerts and News Tab in the Streamster and listed four basic Economic indicators: GDP (Gross Domestic Products), Industrial Production, the Employment Report and Jobless Claims.In this section, I will cover other important Economic indicators that affect economic performance and that can be used to predict future performance: Producer Price Index, Consumer Price Index, Leading Indicators and Consumer Confidence.
PPI (PRODUCER PRICE INDEX)
The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output.
The Producer Price Index (PPI) measures prices of goods at the wholesale level. There are three broad subcategories within PPI: crude, intermediate, and finished. The market tracks the finished goods index most closely, as it represents prices for goods that are ready for sale to the end user. Goods prices at the crude and intermediate stages of production often provide an indication of incoming inflationary pressures.
The PPI is often used as a leading indicator of consumer inflation in the future, as additional costs of producing goods are often passed on tothe consumer in due course.
The consumer price index (CPI) is a related index, but differs in that the CPI measures the price paid by the end users. Other price indexes are sometimes used, for example a labor price index.
The PPI measures price changes in the manufacturing sector. Inflation at this production level often gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months. Investors need
to monitor inflation closely. Just knowing what inflation is and how it influences the markets can put an individual investor head and shoulders above the crowd.
As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates accordingly. By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.
CPI (CONSUMER PRICE INDEX)
The Consumer Price Index (CPI) measures the rate of inflation experienced by consumers. The reading represents the monthly change in the average price of a fixed basket of goods and services purchased by consumers. Higher inflation generally leads to higher interest rates, which tend to strengthen the country's currency.
The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services; it also measures the rate of inflation experienced by consumers. CPI reports price changes in over 200 categories and also includes various user fees and taxes directly associated with the prices of specific goods and services.
The CPI is a fixed quantity price index and a sort of cost-of-living index. It has been criticized for overstating inflation, because it does not adjust for substitution effects and because the fixed basket does not reflect price changes in new technology goods which are often declining in price. Despite these criticisms, it remains the main inflation index.
CPI EXCLUDING FOOD AND ENERGY
"Core rate" of inflation representing movement in volatile food and energy prices have been introduced. It represents CPI excluding food and energy, however including some other volatile components as apparel, tobacco, airfares, and new cars. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included; income taxes and investment items (like stocks, bonds, life insurance, and homes) are not included.
By tracking the trends in inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform.
LEADING INDICATORS
The Leading Indicators report is a composite index of ten economic indicators that typically lead overall economic activity: - Average workweek of production workers in manufacturing. - Average weekly claims for state unemployment. - New orders for consumer goods and materials - Vendor performance (companies receiving slower deliveries from suppliers) - Contracts and orders for plant and equipment - New building permits issued - Change in manufacturers unfilled orders, durable goods - Change in sensitive materials prices - Index of stock prices - Money supply - Index of consumer expectations.
The leading indicators series was previously published by The Commerce Department, however, the collection and publishing of these data is from 1996 done by the non-profit Conference Board, which also produces the Consumer Confidence Index. That increased usefulness of the leading index. Conference Board researchers quickly scrapped two of the old components - the change in sensitive materials prices and unfilled orders for durable goods - and added the interest-rate spread that appears in our list above.
The index of Leading Indicators is designed to predict turning points in the economy such as recessions and recoveries. Of course, even a strong trend like that does not guarantee that a recession will not form over the coming six to nine months. But we can get additional help from looking at the leading index with the coincident index, which is also published by The Conference Board, and alongside a couple of other leading indices.
CONSUMER CONFIDENCE
Like the index of Leading Indicator, Consumer Confidence is a survey conducted by The Conference Board in five thousand households across the country. It pictures consumer attitudes; concerning both the present situation as well as expectations regarding economic conditions. The level of consumer confidence is directly related to the strength of consumer spending.
The index consists of two sub indices - consumers' appraisal of current conditions and their expectations for the future. Expectations make up 60% of the total index, with current
conditions accounting for the other 40%. The expectations index is typically seen as having better leading indicator qualities than the current conditions index.
Again, I suggest you to trade with virtual money for as long as possible, before trading your own real funds. In the learning process,
fundamental and technical analyses have a very important place.
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