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+(XM) © C= personal consumption ° rivate 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 © CPIneeds 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ISM: gauges business confidence Above 50: optimism Below 50: pessimism PMI and GDP move together PMLis 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 ing 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 tuning point Investors compile many indicators, rather than one, to predict turning points Turing 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