Secrets of Economic Indicators

The purpose of the book throughout was to help people get a better understanding of how to look at economic indicators, why they can be so influential, what they might tell us about the future, and how people can best utilize all that information.

Bernard Baumohl

401 Pages

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  • Bernard Baumohl   
  • 401 Pages   
  • 18 Feb 2015
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    “Bernie Baumohl has written a “must read” educational and reference book that every individual investor willfind indispensable for watching, monitoring, and interpreting the markets. The daily flow of high-frequency eco-nomic indicators is the stuff that makes financial markets move and that can signal the big trends that make orbreak investor portfolios. Most important, Bernie’s long experience in reporting economics for Time Magazinehelps make the “dismal science” lively and read more..

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    The Secrets ofEconomic Indicators01Baumohl_Ch00.qxd 8/3/04 7:31 AM Page i read more..

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    In the face of accelerating turbulence and change, business leaders and policy makers need new ways of thinking to sustain performance and growth.Wharton School Publishing offers a trusted source for stimulating ideas from thought leaders who provide new mental models to address changes in strategy, management and finance. We seek out authors from diverse disciplines with a profound understanding of change and its implications. We offer books and tools that help executives respond to the read more..

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    The Secrets ofEconomic IndicatorsHidden Clues to Future Economic Trends and Investment OpportunitiesBernard Baumohl01Baumohl_Ch00.qxd 8/3/04 7:31 AM Page iii read more..

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    Library of Congress Catalog-in-Publication: 2004105831Publisher: Tim MooreExecutive Editor: Jim BoydEditorial Assistant: Rick WinklerMarketing Manager: Martin LitkowskiInternational Marketing Manager: Tim GalliganManaging Editor: Gina KanouseProject Editor: Michael ThurstonDesign Manager: Sandra SchroederCover Design: Nina ScuderiComposition: The Scan Group, Inc.Interior Design: The Scan Group, Inc.Manufacturing Buyer: Dan Uhrig2005 by Pearson Education, Inc.Publishing as Wharton School read more..

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    WHARTON SCHOOL PUBLISHINGC. K. PrahaladTHE FORTUNE AT THE BOTTOM OF THE PYRAMIDEradicating Poverty Through ProfitsYoram (Jerry)Wind, Colin Crook, with Robert GuntherTHE POWER OF IMPOSSIBLE THINKINGTransform the Business of Your Life and the Life of Your BusinessScott A. ShaneFINDING FERTILE GROUNDIdentifying Extraordinary Opportunities for New Ventures01Baumohl_Ch00.qxd 8/3/04 7:31 AM Page v read more..

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    WHARTON SCHOOL PUBLISHINGEditorial Board■Dr. David C. SchmittleinIra A. Lipman ProfessorProfessor of MarketingDeputy Dean, The Wharton SchoolChair of the Editorial Board■Dr. Yoram (Jerry) WindThe Lauder Professor, Professor of MarketingDirector, The Wharton FellowsDirector, SEI Center for Advanced Studies in ManagementWharton Editor, Wharton School Publishing■Dr. Franklin AllenNippon Life Professor of FinanceProfessor of EconomicsCo-Director, Financial Institutions Center■Dr. Peter read more..

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    To my mother, Eva Baumohl, a Holocaust survivor; and in memory of my father, Naftali Baumohl01Baumohl_Ch00.qxd 8/3/04 7:31 AM Page vii read more..

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    ixContentsAcknowledgmentsxiiiPrefacexviiC HAPTER1The Lock-Up1U.S. Economic Indicators6International Economic Indicators13C HAPTER2 A Beginner’s Guide: Understanding the Lingo17Introduction17Annual Rates17Business Cycle18Consensus Surveys19Moving Average20Nominal Dollars Versus Real Dollars (Also Known as Current Dollars Versus Constant Dollars)20Revisions and Benchmarks21Seasonal Adjustments22C HAPTER3The Most Influential U.S. Economic Indicators25EmploymentEmployment Situation25Weekly Claims read more..

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    National Output and InventoriesGross Domestic Product (GDP)100Durable Goods Orders116Factory Orders123Business Inventories130Industrial Production and Capacity Utilization137Institute for Supply Management (ISM) Manufacturing Survey147Institute for Supply Management (ISM)Non-Manufacturing Business Survey154Chicago Purchasing Managers Index (Business Barometer)157Index of Leading Economic Indicators (LEI)161Housing and ConstructionHousing Starts and Building Permits169Existing Home Sales175New read more..

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    Employment Cost Index262Import and Export Prices268Productivity and Costs275Employer Costs for Employee Compensation282Real Earnings286Yield Curve289C HAPTER4International Economic Indicators: Why Are They So Important?295German Industrial Production298German IFO Business Survey300German Consumer Price Index (CPI)302Japan’s Tankan Survey306Japan Industrial Production 312France Monthly Business Survey (INSEE)317Eurozone—Manufacturing Purchasing Managers Index (PMI)320Global—Manufacturing read more..

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    xiiiAcknowledgments One gratification that comes with completing a book is that I now get a chance to thankthose who I relied on for advice, contacts, and support along the way. To be sure, thereare many people to thank. So many, in fact, that mentioning all their names would greatlylengthen the size of this book. Still, there are some that deserve special mention becausethey were so giving of their time and in their counsel.I must begin by breaking with some tradition. It is customary practice read more..

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    AcknowledgmentsFinally, one of the luckiest things to have happened to me was to work with JimBoyd, my editor at Prentice Hall. Writing a book the first time can be a daunting experi-ence but Jim made the process so much easier with his intelligent guidance and sense ofhumor. It was a real privilege working with him. I also want to thank Michael Thurston,project editor at Pearson Education, who supervised the production of this rather compli-cated book. Let me make one last note. Though I made read more..

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    About the A uthorBernard Baumohl is director of The Economic Outlook Group, a consulting firm thatevaluates global economic trends and risks. He was an award-winning TIME magazineeconomics reporter for two decades and covered the domestic and international economyfrom TIME’s New York and Washington bureaus. As an economist for EuropeanAmerican Bank, he monitored and developed forecasts of U.S. economic activity. He alsoserved as an analyst for the Council on Foreign Relations. A frequent guest read more..

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    Pr eface“You want to write a book about what? Economic indicators? How did you come up withthis death wish?” That was the first response I got after telling a colleague at TIME what I was up to.She, too, was a financial journalist, and so I expected some sage advice and support. Wecontinued our conversation over lunch. “Did I hear you correctly?” she asked, stillincredulous. “We are talking about you writing a book on economic statistics right?” Yes,I nodded, and then went on to read more..

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    PrefaceIndeed, most Americans have little desire to follow such esoteric measures. They arecontent to rely on the insights of their investment advisers or hear television pundits museendlessly about the economy and the financial markets. Other than that, few show interestin probing any further. However, that attitude changed abruptly in 2000 with the bursting ofthe stock market bubble and the collapse of the sector. Investors were sickened andthen angered by the resulting loss of read more..

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    PrefaceBut how do you begin to evaluate these economic reports? There is such a bewilderingvariety of economic statistics in the public domain that following them all can be harmful toyour health. New sets of economic numbers come out every day, week, month, and quarter,and they often tell conflicting stories about what’s going on in the U.S. In addition, stocks,bonds, and currencies react differently to economic indicators. Some economic news cancause tremors in the financial markets, while read more..

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    Preface• What does the economic indicator have to say about the future? The purpose of thisquestion is twofold. The reader is first shown how to become familiar with the offi-cial report and its accompanying tables. Particular emphasis is placed on highlight-ing the most interesting and useful data points in the economic release. Second,guidance is given on how to locate valuable clues in the tables that may offer read-ers a heads-up on how the economy might perform in the months ahead. To read more..

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    Prefacecomprehensiveness, accuracy, and timeliness. In this chapter, I’ve listed sites on theInternet that in my judgment are the best and most trustworthy for international eco-nomic data—and that are available in English! Once again, every site listed is free, atleast at the time of this writing.Finally, let me close by saying that this book was fun to write largely because Ilearned a great deal in the process. It was not meant to be a textbook or some intellectualtreatise on the economy. read more..

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    C HAPTER1The Lock-UpShortly after dawn on most weekday mornings, a strange ritual takes place in WashingtonD.C. Two dozen select men and women leave their homes, grab their newspapers, andrush off to spend part of the day under virtual house arrest. Yes, house arrest—as in incar-ceration. Precisely where they go to be confined can vary day to day. It could be in adilapidated government building one morning and a high-tech office complex the next.Regardless of the location, what occurs in all read more..

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    At 7:55 a.m. sharp, a government official walks in and picks up a wall phone to callthe Naval Observatory, home to the Vice President of the United States. It is also thelocation of the ultra-accurate atomic clock. She listens intently for a few seconds and thenabruptly hangs up without saying a word. The individual then inserts a key into a lock onthe wall, which allows her to adjust the digital clock to the precise second. With the cor-rect time now set, the official then turns around to make read more..

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    3Chapter 1 • The Lock-Upemployment release would carry dismal economic news, with the number of people with-out jobs rising—a troubling sign the economy was weakening. At least that was the opin-ion of most professional forecasters whom these reporters consulted just days earlier.But on this particular morning, the employment report stuns everyone. Those in thelock-up room read with amazement that companies actually hired workers in far greaternumbers than anyone expected. Moreover, other read more..

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    8:29:30“Thirty seconds!” The fingers of reporters hover over their computer’sSend button, ready to dispatch the latest employment news to the world. On-air reportersare also prepared to deliver the news live.8:29:50An official counts the final seconds out loud.“Ten . . . nine . . . eight . . . seven . . . six . . . five . . . four . . . three . . . two . . . one!”8:30:00“Transmit!” Reporters simultaneously hit the Send buttons on their key-boards. In seconds, electronic news read more..

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    At the same time, the New York Mercantile Exchange explodes into action.Commodity specialists in the cavernous trading room are also caught off guard by thejobs report and are now gesturing wildly and barking out orders to buy oil and gasolinecontracts on the expectation that a resilient economy will drive up demand for fuel in thefuture. After all, as business activity accelerates, factories operate longer hours and usemore electricity. Business and leisure travel should pick up as well. read more..

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    It makes no difference whether one is a business owner, a retiree, a housewife, anemployee, a homeowner, or a renter. All will eventually feel the fallout from the newsthat came from the Labor Department’s press room that morning. That fallout will pro-duce a mixture of both favorable and unfavorable developments.What might the benefits be? Clearly, rising employment is positive for the economy.The more American workers earn, the more they have to spend on goods and services. Aslong as read more..

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    created the perfect climate for abuse. Politicians tried to control the release of economicnews to score points with voters. When President Nixon heard the CommerceDepartment was about to go public with an upbeat figure on housing starts, he pressedthe agency to time the release for maximum political effect. On those occasions wheneconomic figures turned out to be a liability, Nixon sought to hold up the report untilsuch time he believed its release would get little notice.Even Wall Street firms read more..

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    8Chapter 1 • The Lock-UpThe federal government and private groups release dozens of economic reports on a weekly, monthly, or quarterly basis. Each is a barometer that measures activity in a particular segment of the U.S. economy. By following these indicators, one can get the latest reading on the economy's health and valuable clues on where it is heading.02Baumohl_Ch01.qxd 8/3/04 7:32 AM Page 8 read more..

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    9U.S. Economic Indicators02Baumohl_Ch01.qxd 8/3/04 7:32 AM Page 9 read more..

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    The confusion doesn’t stop there. Another complication, one especially maddening toinvestors and economists, is that people can behave counterintuitively. Just look at two osten-sibly related reports: consumer confidence and consumer spending. The first measures thegeneral mood of potential shoppers; if they are upbeat about the economy, it stands to reasonthey will spend more. If there is widespread gloom and uncertainty about the future, logicwould lead you to believe people will curb their read more..

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    The monthly construction spending report by the Commerce Department is one thatgets substantially revised and is thus often ignored by the investment community.In contrast, housing starts figures are rarely revised, which is why this indicator istaken far more seriously.•Timeliness of the indicator: Investors want the most immediate news of the econ-omy that they can get their hands on. The older the data, the more yawns it evokes.The more current it is, the greater the wallop it packs on the read more..

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    Investors in the financial markets also have their favorite indicators; the specificmeasures they watch depend on what assets are at greatest risk. Those trading stocksfocus on indicators that foreshadow changes in consumer and business spending becausethey can affect future corporate profits and the price of shares (see Table 1B). For bondtraders, the looming concern is not company profits but the outlook for inflation andinterest rates. Any evidence suggesting that inflation might accelerate read more..

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    Table 1D: Indicators That Most Influence the U.S. Dollar’s ValueRankIndicatorPage1Employment Situation Report (Payroll Survey)252International Trade2233GDP1004Current Account2375Industrial Production/Capacity Utilization1376ISM Report—Manufacturing1477Retail Sales628Consumer Prices2459Weekly Claims for Unemployment Insurance3810Productivity and Costs275INTERNATIONAL ECONOMIC INDICATORSUp to now, we’ve been dealing only with U.S. economic reports. Now let’s look at thegrowing importance read more..

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    who would have imagined that a bond default by Russia in 1998—a country with aneconomy the size of Illinois and Wisconsin combined—would be considered so grave athreat to world financial markets that the Federal Reserve was under pressure to orches-trate a global rescue plan to calm investors worldwide?Just how dependent have American companies become on other nations for profitsand job creation? The numbers speak for themselves. Nearly half the earnings of S&P500 firms come from read more..

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    For all these reasons international economic indicators have lately taken on a moreprominent role in the formulation of investment and business strategies. However, as withU.S. economic data, literally hundreds of foreign economic measures are released everymonth. With so much information being thrown at investors and business executives eachday, how does one know which one of these statistics are worthy of consideration? Thereis no one simple answer to this question. American companies and read more..

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    C HAPTER2A Beginner’s Guide:Understanding the LingoINTRODUCTIONEvery field of study has its own jargon, an assortment of words or phrases with whichone has to grow familiar to understand the subject. Economic indicators are no different.You will regularly come across certain terms and expressions when dealing with meas-ures of economic performance. No need to worry, though. The language of economicindicators is fairly straightforward if you give it a chance. In many cases their meaningand read more..

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    BUSINESS CYCLELike human nature, the economy has its ups and downs. At times the economy can growrobustly, with household income rising, consumers happily spending, and companies hir-ing and expanding their business. However, there also are periods when the economylooks tired, with growth barely perceptible. There’s less consumer shopping and little, ifany, new business investment under way. In the most extreme case, the economy actuallyshrinks, which is what happens in a recession. Over time, read more..

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    left to a select group of academic economists working under the National Bureau ofEconomic Research (NBER), a non-governmental and nonpartisan think tank based inMassachusetts. They make the call on whether the economy has turned down or up byevaluating several key economic indicators, such as job growth, personal income, indus-trial production, as well as the quarterly GDP figures. According to the NBER, there have been 32 business cycles in the U.S. since 1854,with the average recession read more..

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    Chapter 2 • A Beginner’s Guide: Understanding the Lingo20MOVING AVERAGEThere’s great temptation to jump to a conclusion about the economy’s health from justone month’s data, but that’s not a wise practice. Economic numbers can be faulty, inaccu-rate, or at the very least, misleading because of unusual events such as a major laborstrike or severe weather conditions. Such situations can diminish the reliability of an eco-nomic indicator in the short term, so it’s important to use read more..

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    Let’s now look at company A. It noted that sales revenue jumped by 10%. However,that doesn’t necessarily mean it sold 10% more sweaters. In fact, the firm ended up sell-ing the same number of sweaters both years. The only reason it received more money inthe second year is because the company raised the price of sweaters by 10%. Thus, theincrease in real (constant) dollar sales was actually zero! Nominal dollars simply reflects the present value of goods and services exchanged inthe read more..

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    when the government introduces new seasonal adjustment factors or decides to undertakea formal change in the methodology itself. Benchmark revisions can affect economic datagoing back five, 10, or even more years to allow for historical comparisons.SEASONAL ADJUSTMENTSBefore most economic indicators are released, they are calculated to reflect seasonaladjustments. What are seasonal adjustments? The simplest way to answer this question iswith an example. It’s no surprise that consumers do a lot read more..

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    to identify as the cause behind any sharp deviation in business activity. By and large, sea-sonal adjustments are important to analysts because they can help identify true deviationsfrom the normal course of activity in the economy. Now that we have reviewed some of the most widely-used terms that accompany eco-nomic indicators, we’re ready to move on to the next chapters. What are the world’s mostinfluential economic indicators, and how do you get the most out of these statistics? Howdo read more..

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    25C HAPTER3The Most Influential U.S. Economic IndicatorsEMPLOYMENT SITUATIONMarket Sensitivity:Very high.What Is It:The most eagerly awaited news on the economy. Are jobs beingcreated? It has great economic and political significance. News Release on Internet: Home Web Address: Time:8:30 A.M. (ET); announced generally on the first Friday of eachmonth and covers the month just concluded.Frequency:Monthly.Source:Bureau of read more..

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    forward. If fewer people are working, spending drops off and business suffers. Becausehousehold spending accounts for two-thirds of the economy’s total output, you can seewhy the investment community pays such close attention to the employment report.There is another reason why it has such a hold on the financial markets. The jobnumbers often contain surprises. Experts have a difficult time trying to predict the unem-ployment figures because there’s so little other information out yet for read more..

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    the government includes in its labor force only those who are actively looking for work.Any jobless person who is so discouraged by the poor employment prospects that he orshe is not actively seeking employment is excluded from the labor force count and thus isnot reflected in the main unemployment rate. (To be fair, the employment report doespublish a separate unemployment rate that includes even discouraged workers, but thislittle-known figure is buried deep in the 25-page release. You’ll read more..

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    Chapter 3 • The Most Influential U.S. Economic Indicators28What makes the establishment survey such a favorite among economists and investorsis that it contains a veritable gold mine of data on the latest changes in employment andincome, information that can reveal much about how well the U.S. economic machine isworking. To give you a sense of the richness of the data in the payroll numbers, the gov-ernment looks at more than 500 different industries. Among the most important statisticsfrom read more..

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    29Employment Situation• Table AMajor Indicators of Labor Market ActivityThis page summarizes the employment situation for the month, and it is well worthdevoting some time to become familiar with how it is presented. The top half con-tains household data, and the bottom half is from the establishment survey. ▲1▲2▲3▲4▲504Baumohl_Ch03.01-03.12.qxd 8/3/04 7:44 AM Page 29 read more..

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    30Chapter 3 • The Most Influential U.S. Economic Indicators(1) This section has the latest count on the size of the civilian labor force and thenumber of those who are, and are not, employed. The far right column is thechange in the figures from one month to the next. Of all the numbers in this sec-tion, the most interesting to watch are changes in household employment. Thiscan be a sensitive leading indicator of an economy turning up because householdemployment also captures the self-employed read more..

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    31Employment SituationOne last point about the unemployment rate—on average, about 150,000 newpeople of working age enter the labor force every month simply because of thenation’s population growth and from students who graduate. This means that theeconomy needs to create that many jobs each month on average just to keep theunemployment rate from rising. Most economist seem to agree that to producethat many new positions every month, the economy must over time expand by at least a 3–4% read more..

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    32Chapter 3 • The Most Influential U.S. Economic Indicatorshours dips below 41, it’s often an indication that the economy is struggling,while 41.5 hours and above suggests business activity is moving into highergear. In recent history, average hours worked in manufacturing has ranged froma recession-level 40.1 to a robust 41.9 hours. Inside the employment report, you’ll also find Table B-2 (not shown), whichbreaks down hours worked for over 30 industry groups. This information can tipoff read more..

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    33Employment Situation• Table A-5Employed Persons by Class of Worker and Part-Time Status(6) Figures on part-time employment tell an interesting tale that is often missed byanalysts. When it’s hard to get suitable full-time work, many people have nochoice but to accept part-time employment. This table shows the number of peo-ple in the non-farm economy who have accepted part-time work for economicreasons, which means they could not locate suitable full-time positions. A steadyupward trend in read more..

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    35Employment Situation•Table A-12Alternative Measures of Labor Underutilization(8) The main unemployment rate gets a lot of play in the press. However, as men-tioned earlier, it excludes those who are jobless and too discouraged to even lookanymore. The headline unemployment rate also does not factor in full-timeworkers who lost their jobs and have since grudgingly accepted part-timeemployment just to earn a few dollars. However, this table recalculates theunemployment rate to include these read more..

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    36Chapter 3 • The Most Influential U.S. Economic Indicators•Table B-1Employees on Non-farm Payrolls by Industry Sector andSelected Industry Detail (9) It’s well worth watching shifts in the hiring of temporary workers for clues offuture employment. Companies often prefer to employ temporary help as theeconomy turns up before taking the more expensive step of permanently hiringand training new full-time employees. Temps are usually cheaper, and theyalso give firms greater flexibility to add read more..

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    37Employment SituationMARKET IMPACTBondsTraders get quite agitated when there’s a strong jobs report, especially if it’s unexpected.The news can portend accelerating inflation and rising interest rates, both of which areanathema to bondholders. Thus, be prepared for a sell-off in fixed income securities whenjob creation is surging. How far bond prices will fall and how much yields will risedepends on many factors, but the most important is where the economy happens to be inthe business read more..

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    WEEKLY CLAIMS FORUNEMPLOYMENT INSURANCEMarket Sensitivity:High.What Is It:Tracks new filings for unemployment insurance benefits. News Release on Web Address:www.ows.doleta.govRelease Time:8:30 A.M. (ET) every Thursday; covers the week ending theprevious Saturday.Frequency:Weekly.Source:Employment and Training Administration, Department of Labor.Revisions:Minor changes.WHY IS IT IMPORTANTExperts have paid closer attention to this indicator in read more..

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    In addition to counting new filers for benefit payments, this report also keeps tabs onthe overall number of jobless workers who are receiving state unemployment benefits, acategory known as “insured unemployment.” It’s important to point out that not everyonewho is jobless is entitled to unemployment benefits. Labor economists estimate that morethan 10% of initial claim applications for benefits are rejected because they do not meeteligibility requirements. In some industries, such as read more..

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    (2) Do not use a single week’s data on initial claims to interpret a trend. The weeklyseries can be quite erratic. Weeks containing holidays can easily distort the dataon filings. A four-day workweek, for example, can reduce claims by as much as20,000, only to have them surge the following week because they now includethose who didn’t have a chance to apply before. The solution is to look at initialclaims based on a four-week moving average, which is reported here. The four-week average read more..

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    MARKET IMPACTBondsThe fixed income market reacts favorably when the number of new filings for unemploy-ment insurance picks up, especially if it jumps by more than 30,000 applications. A rise infirst-time claims points to a weaker economy and diminishing inflation pressures. Whatunnerves bond investors is a continuous drop in claims because it hints at a sturdier eco-nomic climate ahead. That can prompt fresh concerns of future inflation and lead to lowerbond prices and rising yields. Stocks read more..

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    HELP-WANTED ADVERTISING INDEXMarket Sensitivity:Low. What Is It:A measure of newspaper ads with job openings.News Release on Web Address:www.conferenceboard.orgRelease Time:10:00 A.M. (ET); released the last Thursday of the month andcovers the previous month.Frequency:Monthly.Source:The Conference Board.Revisions:Tends to be minor. WHY IS IT IMPORTANTWhy track help-wanted advertisements in newspapers? It turns out to be a reasonable read more..

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    seeks one employee or several, part-time or full-time, a CEO or a minimum-wage fast-foodserver. Geographically, the focus is on newspaper ads in nine regions in the country:Mountain, Pacific, West North Central, West South Central, South Atlantic, East SouthCentral, East North Central, Middle Atlantic, and New England. In computing the index,the Conference Board gives more weight to areas with larger labor markets.The Conference Board currently uses 1987 as it baseline year (with an index value read more..

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    Besides noting the latest national index, figures are also provided for the two previousmonths and the year-ago level. Economists have noted a correlation between thechanges in help-wanted ads and changes in the employment numbers from the Bureauof Labor Statistics. When help-wanted ads pick up, the employment numbers jumpone or two months later. The lag occurs because it takes a few weeks for people torespond to such advertisements, be interviewed, have their credentials checked out,and finally read more..

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    CORPORATE LAYOFF ANNOUNCEMENTSMarket Sensitivity:Low.What Is It:Counts layoffs announced by public companies. Home Web (data is available only throughsubscription).Release Time:10 A.M. (ET); published a week after the end of the referencemonth.Frequency:Monthly.Source:Challenger, Gray & Christmas.Revisions:No revisions are made to previously released data.WHY IS IT IMPORTANTSince the 1980s, there has been a continuous wave of mergers, plant closings, read more..

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    THE TABLES:CLUES ONWHAT’S AHEAD FOR THEECONOMYThere are no tables to review here because Challenger has not made them available tonon-subscribers. But the press obtains highlights of the report and gives it ample cover-age. By and large, the investment community and economists view these layoff figureswith only limited interest. For one, the numbers are not fresh. They’re based on corporatestatements that were made weeks earlier. Second, several other publicly-released indica-tors on read more..

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    StocksEquity investors rarely initiate trades based solely on the Challenger report.Shareholders respond to news of layoffs the moment they are first made public by thecompanies themselves. DollarThis report has no impact on the foreign exchange markets.47Corporate Layoff Announcements04Baumohl_Ch03.01-03.12.qxd 8/3/04 7:44 AM Page 47 read more..

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    MASS LAYOFF STATISTICS (MLS) Market Sensitivity:Low.What Is It:Measures actual layoffs in business and government.News Release on Web Address:www.bls.govRelease Time:10 A.M. (ET); report is out four weeks after the end of the month. Frequency:Monthly. Source:Bureau of Labor Statistics, Department of Labor. Revisions:Data is revised for the last two months.WHY IS IT IMPORTANTThere are presently two major sources of information on layoffs. One is the Challenger,Gray read more..

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    HOW IS IT COMPUTEDThe BLS first contacts state agencies for the latest initial unemployment insurance claims.It then sorts through the data to find out how many of those who filed a claim were theresult of mass layoffs. Companies and government agencies are also contacted to see howmany of the job eliminations lasted 31 days or longer. After compiling the numbers, theBLS publishes two reports. One is the monthly “Mass Layoff Statistics,” which is whatthis section is about, and the other is a read more..

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    50Chapter 3 • The Most Influential U.S. Economic Indicators▲ 1▲ 2▲ 304Baumohl_Ch03.01-03.12.qxd 8/3/04 7:44 AM Page 50 read more..

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    • Table 2Industry Distribution: Mass Layoff Events and Initial Claimants forUnemployment InsuranceThis table, which is only partially shown here, tells how widespread these layoffsare across different industries and in government.51Mass Layoff Statistics (MLS)• Table 4State Distribution: Mass Layoff Events and Initial Claimants forUnemployment Insurance (Not Shown)This is a state-by-state breakdown of large layoff events and the number of peoplewho filed for unemployment benefits.MARKET read more..

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    PERSONAL INCOME ANDSPENDINGMarket Sensitivity:Medium. What Is It:Records the income Americans receive, how much they spend, andwhat they save.News Release on Web Address:www.bea.doc.govRelease Time:8:30 A.M. (ET); data is made public four or five weeks after theend of the reported month. (The Bureau of Economic Analysis expects tohave this report out two weeks earlier by 2006.) Frequency:Monthly.Source:Bureau of Economic Analysis, read more..

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    53Personal Income and Spending•Proprietors’ income (8%): A fancy term for self-employed that includes both farmand non-farm businesses, such as store owners, private-practice doctors, independ-ent plumbers, lawyers, and consultants. • Rental income (1.4%): Represents earnings people receive from renting or leasingreal estate (as long as this is not their primary business). •Dividend income (4.4%): Money stockholders get from corporations.• Interest income (11%): Comes from investments read more..

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    In addition to the dollar amount of savings, it’s also useful to know the percentage ofdisposable personal income that is saved; this is known as the personal savings rate. Forinstance, if you save $5 out of every $100 in disposable personal income, the savings rateis 5%. Back in the 1960s and early 1970s, households were relatively thrifty and main-tained a savings rate often above 8%, which meant they saved at least $8 out of every$100 of after-tax income received. By the end of the 1990s, read more..

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    55Personal Income and SpendingAs for the savings level, no fancy tricks here. It’s strictly a residual number; savings iswhatever remains after you subtract total consumer outlays from personal disposable income. THE TABLES:CLUES ONWHAT’S AHEAD FOR THEECONOMY• Table 1Personal Income and Its Disposition (Months)(1) This first table records monthly dollar amounts of personal income and outlays incurrent dollars and at annualized rates. Each of the major contributors to incomeis presented read more..

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    (2) A better portent of future consumer demand can be found in real disposablepersonal income, which is labeled near the bottom of the table as chained dol-lars. This is monthly income left over after taxes (and other non-tax paymentsto the government) and then is adjusted for inflation. It’s the best measure oftrue consumer purchasing power. Here’s why. Suppose disposable personalincome climbed by 1% the previous month, but the general price level (orinflation) also rose by the same amount. read more..

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    (5) Further down the table is the personal savings rate. This figure is interesting butnot of great forecasting value. By definition, savings does not include any appre-ciation in the value of one’s stocks, bonds, or real estate portfolio. Thus, anyonewho invested in real estate or in the equity market over the last twenty yearswould have seen their household wealth increase, yet that wealth would notshow up as part of personal savings.Does it pay to track savings at all? Only if there’s a read more..

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    • Table 7Real Personal Consumption Expenditures (PCE) by Major Typeof Product(7) Up to this point, all figures on personal spending (PCE) were based on currentdollars, which is not adjusted for inflation. This table presents real (inflation-adjusted) spending on a monthly basis, a subcategory that is particularly inform-ative because it helps predict the pace of economic growth. Remember thatsome two-thirds of the GDP is based on real PCE. All you have to do is look atthe latest three-month read more..

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    (8) When it comes to discussing inflation in the economy, most everyone refers tothe CPI (consumer price index). However, a growing number of economists andpolicymakers, including those at the Federal Reserve, believe the best measureof consumer inflation in the economy is the PCE price index. It’s also used tohelp convert personal spending from current dollars (which is not adjusted forinflation) into constant dollars (which is adjusted for inflation). Most investorsand business executives, read more..

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    61Personal Income and SpendingMARKET IMPACTThe personal income report gets only a lukewarm reception from the financial markets.By the time it’s released—which is quite late in the month—investors have alreadyreceived some news on individual income and spending from the employment report andthrough the retail sales data. Thus, the late publication date for personal income andspending has diminished the value to traders. BondsFixed income investors prefer to see listless growth in both read more..

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    RETAIL SALESMarket Sensitivity:High.What Is It:First report of the month on consumer spending; capable of bigsurprises.News Release on Web Address:www.census.govRelease Time:8:30 A.M. (ET); available about two weeks after the month ends. Frequency:Monthly.Source:Bureau of the Census, Department of Commerce.Revisions:Can be huge from month to month. Each release also contains broadrevisions of the two previous months to reflect more complete read more..

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    paid more to cover the higher prices charged by merchants. Finally, the initial monthlyretail sale releases, known as the advance report, tend to be extremely volatile and thusmisleading. It’s not unusual for the government to report that retail sales fell one month,only to have them revise it later to show an increase. Nonetheless, the government has made some progress in modernizing this economicseries. For instance, the retail sales report now includes purchases made through theInternet, read more..

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    • Table 2Percent Change in Estimated Advance Monthly Sales for Retailand Food Services, by Kind of Business(1) Just how much more—or less—did people buy from retailers in the last fewweeks? This answer can be very revealing. Shifts in consumer spending behaviorcan provide useful insight into the present mood of American households. Thiscolumn records the percentage change in retail spending by shoppers in each ofthe last two months and for their latest 12-month period. However, keep in read more..

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    (4) This table also shows how various consumer-based industries fared from changesin retail sales. By looking at the performance of individual producers, one can seewhich sectors benefited the most in the latest period and whether one or twoindustries were chiefly responsible for the rise or fall in overall retail sales.MARKET IMPACTThough unreliable, the advance report on retail sales still manages to stir up the financialmarkets.BondsMoney managers in the fixed income market get all nervous read more..

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    E-COMMERCE RETAIL SALESMarket Sensitivity:Low.What Is It:Measures sales of retail goods purchased through the Internet.News Release on Web Address:www.census.govRelease Time:10 A.M. (ET); released about seven weeks after the end of thequarter being covered.Frequency:Quarterly. Source:Census Bureau, Department of Commerce.Revisions:Each report comes with revisions for the prior quarter.WHY IS IT IMPORTANTThe bursting of the Internet bubble on Wall read more..

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    It’s only in this quarterly e-commerce sales report where the details of online shop-ping are featured. One point to keep in mind is that not all online sales are included inthis report. Just as the monthly retail trade data excludes services (such as travel agenciesand financial services), they are also kept out of the e-commerce sales data. Besides the Census Bureau, it’s helpful to know that other private organizationsoccasionally provide free reports on Internet commerce. They include read more..

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    MARKET IMPACTBondsThis report has no impact on the fixed-income market. StocksGenerally, news of e-commerce sales produces no meaningful reaction in the equity mar-kets. Internet purchases still represent a very small proportion of all retail sales. Yet, itwould be a mistake to dismiss this release as unimportant. As e-commerce sales rise involume, this report is expected to become much more influential, especially with tech-heavy stock indices, such as NASDAQ. Dollar There is no measurable read more..

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    WEEKLY CHAIN STORE SALESMarket Sensitivity:Medium.WEEKLY CHAIN STORE SALES SNAPSHOTWhat Is It:A weekly retail sales tracking measure of major department stores.News Release on Web Address:www.chainstoreage.comRelease Time:7:45 A.M. (ET). The weekly survey is released on Tuesdays forthe week ending the prior Saturday. The monthly survey is published on thefirst or second Thursday of the following month.Frequency:Weekly and monthly.Source:ICSC read more..

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    71Weekly Chain Store SalesWHY IS IT IMPORTANTWant immediate feedback on how consumer spending has fared the last few days? Whowouldn’t given the critical role shoppers play in the economy. Two competing reports try toprovide near-real-time weekly assessments of consumer buying activity in large retail chainstores. One is the Johnson Redbook Average, which is produced by Redbook Research. Theother is a joint undertaking by the International Council of Shopping Centers and UBS, aglobal financial read more..

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    Unlike the weekly report, the monthly chain store sales survey is authored entirelyby the International Council of Shopping Centers (not in collaboration with UBS) and isbased on hard sales data from close to 80 establishments, including specialized chainssuch as The GAP and Abercrombie & Fitch. Because they have broader coverage, themonthly chain store figures can serve as a rough leading indicator of future non-autoretail sales in the government series. The first set of numbers on the read more..

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    73Weekly Chain Store Sales▲ 1▲ 2Copyright 2004, International Council of Shopping Centers, Inc., New York, New York. Published as WeeklyChain Store Sales Snapshot, dated 2004. Reprinted with permission.04Baumohl_Ch03.01-03.12.qxd 8/3/04 7:45 AM Page 73 read more..

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    •The Johnson Redbook AverageSurvey reports and charts are available only to clients. Others can find the Redbookresults in the press.MARKET IMPACTBondsParticipants in the fixed-income market monitor, if casually, the Redbook and the ICSC-UBS chain store sales reports because they are a good finger-in-the-wind measure of con-sumer spending behavior. If you know what consumers are doing at shopping malls, ittells you something about their appetite to spend. Strong department store sales can read more..

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    CONSUMER CREDIT OUTSTANDINGMarket Sensitivity:Low.What Is It:Tracks monthly changes in consumer installment debt. News Release on Web Address:www.federalreserve.govRelease Time:3:00 P.M. (ET); approximately five to six weeks after the monthbeing reported.Frequency:Monthly. Source:Federal Reserve Board.Revisions:Can be large from month to month.WHY IS IT IMPORTANTThe consumer installment debt release usually evokes little more than a yawn from read more..

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    If the amount of consumer credit outstanding increases for the month, it meanshouseholds have borrowed more than they paid off in that period and reflects greater per-sonal spending. When households feel secure about their jobs and income, they becomemore comfortable with taking on new debt. On the other hand, if the economic climateworsens, people tend to be far more cautious about borrowing. Historically, consumerborrowing and spending tend to rise and fall together. In the short term, though, read more..

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    78Chapter 3 • The Most Influential U.S. Economic IndicatorsA couple of pointers here. Growth in consumer credit can have positive as wellas negative consequences for the economy. We’ve already noted that a signifi-cant expansion in borrowing can lead to greater spending and thus stimulate eco-nomic activity. On the flip side, if households accumulate too much debt relativeto their income growth, they will slash spending and use a greater portion oftheir future income to pay off some of this read more..

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    To get the latest reading on credit card delinquencies, go to the American BankersAssociation site, which publishes this data every March, June, September, and the most current numbers on personal bankruptcy filings, check out the AmericanBankruptcy Institute’s site: IMPACTThe consumer credit outstanding data arrives nearly two months late, long after otherconsumer spending reports read more..

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    CAMBRIDGE CONSUMER CREDIT INDEXMarket Sensitivity:Low. What Is It:Measures how individuals are handling consumer debt. News Release on Web Address:www.cambridgeconsumerindex.comRelease Time:8:30 A.M. (ET); comes out the fifth business day of every month,the same day the Federal Reserve releases consumer credit outstanding. Frequency:Monthly.Source:Cambridge Credit Counseling Corp.Revisions:Figures are not revised. WHY IS IT read more..

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    HOW IS IT COMPUTEDEvery month, the Cambridge Credit Counseling Corp., a firm that helps over-indebtedAmericans reduce their IOUs, releases the results of a poll that tracks consumer senti-ments about credit. Some three to five days before the report is published, the companysurveys more than 1,000 randomly selected households representing an assortment ofdemographic groups. The definition of debt in this report is precisely the same one theFederal Reserve uses in its consumer credit outstanding read more..

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    82Chapter 3 • The Most Influential U.S. Economic IndicatorsReprinted with permission from Cambridge Credit Counseling Corp.04Baumohl_Ch03.01-03.12.qxd 8/3/04 7:45 AM Page 82 read more..

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    • Cambridge Consumer CreditOverall IndexThe overall index is an average of the responses from three main questions asked ofconsumers. It reflects in the broadest sense the inclination of Americans to eitherincrease their use of credit or to reduce their debt by paying more of it off. A risingindex signifies more households are planning to take on debt. A declining index sug-gests fewer Americans are thinking about increasing their borrowing and are focus-ing instead on paying off some debt. read more..

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    • Cambridge Consumer CreditPast MonthThis graph reflects what those interviewed did about debt the previous month.Though an index value of 100 means that half of those polled said they would takeon more debt and the other half were paying off their IOUs, what’s important inthese charts is the emerging trend. • Cambridge Consumer CreditNext Month and the Next Six MonthsThese two vertical bars look at the future plans Americans have with respect to debt.They reflect responses from the second read more..

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    MARKET IMPACTBondsDespite its timeliness and potential as a leading economic indicator, the CambridgeConsumer Credit Index has yet to appear on the radar screen of most fixed income moneymanagers. This is a new measure and it might take time for the financial markets tobecome comfortable with it. Until then, it’s unlikely the bond market will react much tothe release. StocksNor is the index well known among equity investors, but that will change if this measuredemonstrates success at read more..

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    CONSUMER CONFIDENCE INDEXMarket Sensitivity:Medium, but can be high at turning points in the economy.What Is It:Examines how consumers feel about jobs, the economy, andspending.News Release on Web Time:10 A.M. (ET); announced the last Tuesday of the month beingsurveyed.Frequency:Monthly.Source:The Conference Board.Revisions:Minor revisions can occur as more survey results are read more..

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    approaches in their surveys. Conference Board questionnaires place more emphasis onhousehold reaction to labor market conditions, while the University of Michigan gauges con-sumer attitudes on financial and income situations. This puts the Conference Board surveysomewhat at a disadvantage as a leading indicator. The labor market is very slow to react toeconomic changes. For instance, just before a recession bottoms out, stock prices and con-sumer spending often rebounds. But the unemployment read more..

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    HOW IS IT COMPUTEDThe Conference Board’s Consumer Confidence Index began as a bimonthly in 1967 andturned monthly in 1977. It’s based on an attempt to survey approximately 5,000 house-holds nationwide every month. Rarely, however, do that many respond. About 2,500make it in time to be included in the preliminary release of the index. A month later, arevision is published. It includes another 1,000 or so late responses. In the end, though,the difference in outcome between the first report and read more..

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    89Consumer Confidence Index• Press Release on Consumer Confidence The free online press release has the latest numbers for all three indexes—ConsumerConfidence, Expectations, and Present Situations—along with a brief comment onhow much they changed from the previous month and why.One of the Conference Board’s most important questions to respondents each monthis whether they think jobs are easier or harder to find. The percentage of people whosay jobs are plentiful minus the percentage read more..

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    MARKET IMPACTBonds Though questions abound regarding its efficacy as a predictor of household spending, asharp and sustained rise in consumer confidence is nevertheless worrisome to fixed-income investors. It could lead to an acceleration in borrowing and shopping, factors thatcan fuel faster economic growth and stoke inflation. Bond traders prefer to see consumerconfidence less ebullient about the future or an outright decline in the index. This wouldsuggest a retrenchment in spending and more read more..

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    SURVEY OFCONSUMER SENTIMENTMarket Sensitivity:Medium, but can be high at turning points in the economy.What Is It:Near-real-time assessment of consumer attitudes on the businessclimate, personal finance, and shopping.News Release on Web Time:9:45 A.M. (ET); preliminary numbers are released on the secondFriday of each month. Final figures come out the last Friday of the samemonth. read more..

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    92Chapter 3 • The Most Influential U.S. Economic Indicatorsof the month. While that comes out after the Conference Board announces its ConsumerConfidence Index, the Sentiment survey arguably carries more influence amonginvestors. Some analysts view it as a better real-time measure of consumer moodsbecause the data includes interviews taken up to a day or two before the official release.HOW IS IT COMPUTEDThe surveys are taken on weekends with a total of 500 individuals. The University read more..

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    93Survey of Consumer SentimentTHE TABLES:CLUES ONWHAT’S AHEAD FOR THEECONOMYThere does appear to be a correlation between a sustained change in the consumer“expectations” index and consumer spending in the next six months to a year—especiallyin the area of big-ticket items such as autos and home sales. As for accessing the actual report on the Web, most details on the monthly ConsumerSentiment Survey are reserved for subscribers. The organization does provide for free onits Web site a read more..

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    ABC NEWS/MONEY MAGAZINECONSUMER COMFORT INDEXMarket Sensitivity:Low.What Is It:A survey of consumer attitudes.News Release on Internet: Web Address:www.abcnews.go.comRelease Time:6:30 P.M. (ET) every Tuesday. Frequency:Weekly. Source:ABC News/Money magazine.Revisions:No revisions.WHY IS IT IMPORTANTThe ABC News/Money Magazine Consumer Comfort Index is not known to animate theinvestment community very much, especially given the existence of two major read more..

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    whether they are presently in a buying mood. Results from this poll are combined withthe 750 responses accumulated during the previous three weeks so that in any givenweek, the ABC News/Money Magazine Consumer Comfort Index is based on a rollingfour-week average for a total sample of about 1,000 people.Calculating the index is more straightforward. The negative responses to each indexquestion are subtracted from the positive responses. The results of the three questions arethen added and divided read more..

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    the weekly Consumer Comfort Index is that it offers a heads-up on the outcome ofthe more market-sensitive Consumer Confidence and Consumer Sentiment meas-ures.96Chapter 3 • The Most Influential U.S. Economic IndicatorsMARKET IMPACTBondsInvestors often note the results of the ABC News/Money Consumer Comfort Index butgenerally don’t respond to it in any measurable way. There are only two circumstanceswhen this report can cause a stir in the bond market, and they might have to occur read more..

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    UBS INDEX OFINVESTOR OPTIMISMMarket Sensitivity:Low for now, but can increase in the future.What Is It:Measures changes in investor confidence.News Release on Web Time:8:30 A.M. (ET), with data published the fourth Monday of themonth being covered.Frequency:Monthly.Source:UBS and the Gallup Organization.Revisions:No revisions done.WHY IS IT IMPORTANTOne of the most intriguing economic indicators also happens to be one of the read more..

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    40% of all U.S. households and more than 80% of the financial wealth in the U.S. Withinthis population group, about 800 households are randomly selected from across the coun-try and interviewed by phone in the first two weeks of each month. They are asked torespond along three major themes. The first consists of seven questions, which form thebasis of the overall Index of Investor Optimism:1. Overall, are you optimistic, pessimistic or neither that you will be able to achieveyour investment read more..

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    • UBS Report on Index of Investor Optimism (Not Shown)While there appears to be a positive correlation between key stock indexes andfuture consumer expenditures, precisely how much changes in equity values influ-ence household spending depends on many factors, including the magnitude of themovement in stock values, the level of interest rates, and the growth in personalincome from wages and salaries. Though there is a link between the performance of one’s stock portfolio and futurespending, read more..

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    GROSS DOMESTIC PRODUCT (GDP) Market Sensitivity:Medium to high.What Is It:The foremost report on the health of the economy, GDP measureshow fast or slow the economy is growing. News Release on Web Address:www.bea.doc.govRelease Time:8:30 A.M. (ET); advance estimates are released the final week ofJanuary, April, July, and October. Two rounds of revisions follow, each amonth apart. (The Bureau of Economic Analysis expects to speed up therelease of read more..

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    By looking at GDP performance over the last 50 years, it becomes clear that the U.S.economy has a natural predilection to grow. Business activity has been expanding farmore years than it has been contracting. Though recessions have not disappeared, they are definitely shorter and shallower since World War II, and that is important to the eco-nomic and social welfare of the country. The faster and longer the economy grows, thehigher the level of employment. With more people working, total read more..

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    • Table 3Gross Domestic Product and Related Measures: Level andChange from Preceding PeriodNote that all numbers are expressed in billions of dollars and at annual rates. (Thegovernment uses annual rates to show how the economy would perform if that quar-terly pace were maintained for a full year.) Looking at this table, we see two maincolumns on GDP growth: billions of current dollars and billions of chained dollars.Don’t worry about the jargon. “Current dollars” represents nominal GDP, read more..

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    (2) Personal Consumption Expenditures (PCE): This is essentially all spending byconsumers on goods and services, and it accounts for 70% of total GDP. Byvirtue of its massive role in the economy, if households are not in a spendingmood, it spells serious trouble for the economy, with a recession nearly unavoid-able. For this reason, analysts closely monitor the dozen or so monthly economicindicators that report on consumers’ moods, income, and spending. What are people spending money on? A read more..

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    Business investment picks up if the economy is expected to show sustainedgrowth, but such expenditures can drop sharply if signs emerge that economicactivity is faltering. Business expenditures fall into two broad headings: fixed investment and thechange in inventory investment. Fixed investment: The lion’s share of all business spending is in fixed invest-ment, which covers non-residential expenditures (for example, office buildings,warehouses, computer equipment and software, machine tools, read more..

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    the change in inventories. Total demand for hats was 800, plus the change ininventories, which, in this case, dropped by 100. Thus, the result is real output of700 hats. As you can see, it’s not the level of inventories that is used to compute the GDP,but the change in inventories from one period to the next. Inventories can fluctuate wildly at turning points in the economy. In recent years,computers have made it easier to prevent inventories from getting too far out ofline with sales. read more..

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    outlays, with state and local purchases accounting for the rest. The GDP tabledivides federal expenditures into defense spending (military hardware andsalaries of military and civilian employees in the armed forces) and non-defensespending (such as highway construction, NASA, the Park Service, and thesalaries of non-defense federal employees). State and local governments are two-thirds of all official spending and invest-ment (for example, street construction, police, and fire-fighting read more..

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    problem with using current dollars is that it can be hard to discern whether anincrease in GDP came about from greater output of goods and services or simplybecause of higher prices. People benefit by having more goods and services to pur-chase, not by paying higher prices for them.So how can you determine how much of the rise in GDP was due to real expansionand how much the result of inflation? The way to do this is to collect the currentdollar value of all goods and services and then strip out read more..

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    (10) Deflator for Personal Consumption Expenditures (PCE): Which of the majorinflation measures should you rely on to help predict monetary policy or con-sumer spending behavior? The consumer price index (CPI) has traditionallybeen the main indicator of choice for the financial markets and labor unions.However, several studies have concluded that the most comprehensive and accu-rate measure of price changes at the consumer level is the PCE price index.Whereas the CPI merely compares price read more..

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    HOW IS IT COMPUTEDThe GDP report has been a work in progress since the late 1930s, which makes it one ofthe longest-running economic indicators around. Calculating the GDP is a mammothundertaking because we’re talking about an $11 trillion economy. The main responsibilityfor this task falls on the nonpartisan Bureau of Economic Analysis, which is well suitedfor the job given its history and experience. The GDP series is really part of a marvelous national accounting system known as theNational read more..

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    THE TABLES:CLUES ONWHAT’S AHEAD FOR THEECONOMYEmbedded in the GDP report are numerous hints of how the economy, inflation, and thejob market will perform in the months ahead. • Table 1Real Gross Domestic Product and Related Measures: PercentChange from Preceding Period(11) This table provides the latest quarterly growth rates for GDP and its chief compo-nents along with about three years of previous quarterly data to help you gain per-spective on what the economy has been up to lately. When read more..

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    However, this leads to an obvious question. If 3% growth is the minimumrequired to lower unemployment, wouldn’t 4%, 6%, or 10% growth be evenbetter? How fast can the economy grow before it gets so overheated it causes aneruption in inflation? There is no simple answer to this question. Much dependson the supply of labor and material resources at the time. Assuming the econ-omy is operating at a low level of unemployment, it is believed the economy’smaximum rate of growth without breaking read more..

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    growth for an extended period of time, it means companies have been produc-ing much more than what people are interested in buying. As a result, invento-ries can swell to undesirable levels, and that will force companies to slow orhalt production. Such a scenario can depress economic growth in the future oreven cause a recession. Much depends on the degree real final sales have fallenand how much unwanted inventories have accumulated.Conversely, if final sales are increasing at a faster clip read more..

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    • Appendix Table AReal Gross Domestic Product and Related Aggregatesand Price Indexes (Not Shown)Some of the most intriguing numbers in the GDP report are buried in a table at theend of the release. One is final sales of computers, a key statistic because it reflectsbusiness spending on technology products. Such outlays rise when companies areoptimistic about the economic outlook and sufficiently confident they’ll see a returnon these investments. Sales of computers can also serve as a read more..

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    StocksThe equity market’s reaction to the GDP report will likely be less reflexive than the bondmarket. Here the central question is how does the latest release affect the outlook for cor-porate profits? A healthy economy generates more business earnings, while a sluggishbusiness environment depresses sales and income. However, there’s an important qualifi-cation here. If economic activity has been racing ahead of the 3.5% rate for several quar-ters, even shareholders start to get nervous read more..

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    DURABLE GOODS ORDERS(ALSO KNOWN AS THEADVANCE REPORT ONDURABLE GOODSMANUFACTURERS’SHIPMENTS,INVENTORIES, ANDORDERS)Market Sensitivity: High. What Is It:A key indicator of future manufacturing activity.News Release on Web Address:www.census.govRelease Time:8:30 A.M. (ET); released 3–4 weeks after the end of the reportingmonth.Frequency:Monthly.Source:Census Bureau, Department of Commerce. Revisions: Revisions can be major and cover the two read more..

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    HOW IS IT COMPUTEDThe advance durable goods report is based on results obtained from 3,500 manufacturersrepresenting 89 industry categories. Firms with $500 million in annual shipments as wellas a handful of smaller companies are asked for figures on new orders, shipments,unfilled orders, and inventories. For military equipment, the government relies onDefense Department data. A new order is considered if it comes with a legally binding agreement to purchase aproduct for immediate or future read more..

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    (2) Orders excluding transportation: As you can see from the title, this categoryrecords the number of new orders—but without the transportation component.Why subtract transportation from the total? Orders for civilian aircraft occur inperiodic bursts and are hugely expensive. When a large order is received, itswells the total value of new orders for a brief period, greatly exaggerating theunderlying pace of demand for durable goods, only to plummet the next monthwhen it returns to a more read more..

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    (4) In addition to the broad headings above, the advance report on durable goodscontains more detail on orders for different industry groupings: •Primary metals*• Fabricated metals• Machinery• Computers, communications equipment, and electronic products• Electrical equipment and appliances •Transportation• All other durables*Primary metals: When large manufacturers gear up to increase production,their first step is to make sure they have adequate supplies of industrial read more..

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    121Durable Goods OrdersUnfilled Orders• Table 2Durable Goods Manufacturers’ Unfilled Orders and TotalInventories(7) Unfilled orders: This measure is a favorite among economists because it warnsof bottlenecks in the production process that can cause delays in deliveries andeven lead to inflation pressures. Unfilled orders is an indication of how strainedmanufacturing resources are. That is, orders are coming in too fast for manufac-turers to satisfy them on a timely basis. To correct this, read more..

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    What happens if unfilled orders abruptly decline? This can occur for two rea-sons: either companies are operating at optimal levels and thus can quickly satisfy all orders coming in, or orders themselves have markedly tapered off.The latter can hurt the economy by putting in jeopardy future production andjobs. By and large, unfilled orders tend to rise when the economy is growingrobustly, and drop when business activity turns anemic. Inventories Whenever factory output exceeds orders, it can read more..

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    FACTORY ORDERS(FORMALLY KNOWN ASMANUFACTURERS,SHIPMENTS,INVENTORIES, ANDORDERS)Market Sensitivity:Low to medium.What Is It:A comprehensive measure of manufacturing orders and sales.News Release on Web Address:www.census.govRelease Time:10 A.M. (ET); published 4–5 weeks following the end of the month. Frequency:Monthly.Source:Census Bureau, Department of Commerce.Revisions:Revisions occur over the next two months and can be read more..

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    124Chapter 3 • The Most Influential U.S. Economic Indicatorsof the Advanced Report on Durable Goods. By the time Factory Order is published, all thenews on durable goods has already been digested. Relatively little attention is paid to non-durables because it possesses little predictive value. Non-durable orders tend to rise at afairly stable rate every month regardless of whether the economy is doing well or not.Consumers will always buy food, clothing, gas, and heating oil because these read more..

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    This table represents the total dollar amount and percent change of new ordersreceived by U.S. factories from both domestic and foreign customers. New orders isan excellent leading indicator because it impacts future production activity. In thisreport, orders themselves are broken down into two types of goods. One is durablegoods, of which we already had an advanced peek the week before, and, in this releasefor the first time, nondurable goods. Recall that durable goods are considered read more..

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    (1) All manufacturing industries: The best way to determine how busy major U.S.factories will be is to look at the number of new orders coming in, both inabsolute dollar terms as well as the percentage change from previous months.Whether it’s steel mills, autos, computers, communications, aircraft, or dozensof other industries, this is where you’ll get a sense of future production trendsfor each of the industries featured and for manufacturing as a whole. The tablelists new orders for all read more..

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    Though the total dollar amount of orders for nondurable goods orders is noted atthe bottom of Table 2, you’ll notice that there’s no product breakdown of non-durables here. For that, you have to go to Table 1 (not shown) of this release, whichlists the amount of products shipped.• Table 3Value of Manufacturers’ Unfilled Orders for Industry Groups (4) Unfilled orders is one of the most trusted leading indicators of future manufac-turing activity and a good barometer of the overall health read more..

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    outcome from such bottlenecks for the economy is that companies might investto expand capacity and raise output. At the very least, a growing backlog oforders means high factory employment, more overtime, and busy assemblylines. The danger from unfilled orders is that they can cause a buildup of infla-tion pressures as both manufacturing capacity and commodities become scarce.Indeed, Federal Reserve officials closely monitor unfilled orders to detect anyemerging imbalance between the demand and read more..

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    MARKET IMPACTThe Factory Orders report is considered old news to financial markets, so any reactionwill be modest, unless it contains a major revision from the Advance Report on DurableGoods, which is rare. BondsBond prices might inch higher if Factory Orders conforms with other evidence that theeconomy is weakening. A decline in new orders and order backlog would lower the threatof inflation and enhance the chance of an easing in monetary policy by the FederalReserve—all bullish events for read more..

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    BUSINESS INVENTORIES(FORMALLY KNOWN ASMANUFACTURINGANDTRADE INVENTORIES ANDSALES)Market Sensitivity:Low to medium.What Is It:Tracks total U.S. business sales and inventories.News Release on Web Address:www.census.govRelease Time:8:30 A.M. (ET); released six weeks after the month ends.Frequency:Monthly.Source:Census Bureau, Department of Commerce.Revisions:They tend to be small. Annual benchmark changes come out in thespring or summer and can cover read more..

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    when income from sales is down. At the same time, holding a certain level of inventories isvital for businesses. A company has to have something to sell or it can’t make money. Thecentral question for corporate managers is just how much inventory they should carry inlight of present orders and expected future demand for goods and supplies. Historically, inventory problems have been one of the main causes of economicdownturns, and it usually plays out in the following scenario: Retailers with read more..

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    132Chapter 3 • The Most Influential U.S. Economic IndicatorsHOW IS IT COMPUTEDAs mentioned, much of the data for this report has already come out. Only the retailinventory data is new here. These numbers are provided with and without seasonaladjustments. However, they are not annualized or adjusted for inflation.▲105Baumohl_Ch03.13-03.20.qxd 8/3/04 7:38 AM Page 132 read more..

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    THE TABLES:CLUES ONWHAT’S AHEAD FOR THEECONOMY• Cover PageTotal Business Inventories/Sales Ratios(1) For the last 30 years, businesses have shown a desire to hold an average of about1.45 months worth of goods on shelves and in stockrooms. To see where the I/Sratio presently stands, go to the graph that tracks the I/S ratio over the last tenyears. Generally, if the I/S ratio falls much below the 1.45 month trend, companiestypically increase their orders to bring inventories back to preferred read more..

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    134Chapter 3 • The Most Influential U.S. Economic Indicatorsthe economy is rebounding, investments in new inventory resume across thepipeline—from retailers to factories. (3) Though the I/S ratio is itself a lagging indicator, which means it tends to follow,not lead, the overall pace of the economy, its performance can still have implica-tions for the future. For instance, a low I/S ratio can set the stage for faster eco-nomic growth in the coming months as companies seek to replenish read more..

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    has fallen by 10. Again, to measure GDP output in that quarter, you count totalsales (60) and the change in inventory levels (minus 10) to give you total outputof 50 for that quarter. The point here is that changes in inventories play a majorrole in how economic growth is calculated. By monitoring three-month changes in inventory levels in this table, one can get aheads up on whether it will add or subtract from GDP. There’s one catch. This tablemeasures percent changes in inventories based on read more..

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    (5) This table shows how various retailers stand in terms of sales, inventories, andthe I/S ratio. Of the three, the I/S is the most meaningful in serving as a leadingeconomic indicator of future orders and production activity. Specific emphasis isplaced on motor vehicles, home furnishings, building materials, clothing, foodand beverages, and general-merchandise stores.A word of caution: Auto and truck inventories, which account for one-third of totalretail inventories, can be quite volatile in read more..

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    INDUSTRIAL PRODUCTION ANDCAPACITY UTILIZATIONMarket Sensitivity:Medium.What Is It:Records U.S. industry’s output and its spare capacity.News Release on the Web Address:www.federalreserve.govRelease Time:9:15 A.M. (ET); released around the fifteenth of the month andreports on the previous month. Frequency:Monthly.Source:Federal Reserve Board.Revisions:Modest changes are made over the subsequent three months, followedby an annual revision read more..

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    Industrial ProductionThe industrial production (IP) series is like a window into the industrial part of the economyand differs from most other economic indicators in one important respect. It measureschanges in the volume of goods produced. That is, IP doesn’t take the price of these prod-ucts into account so there’s no need to worry about the distorting effects of inflation. Thatmakes it a purer measure of output so it corresponds more closely to the performance ofreal (inflation-adjusted) read more..

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    The Fed first puts out a preliminary release on industrial production two weeks afterthe reporting month, and it is based on only 55% of the data needed. Why such a low fig-ure? Because the investment community and policymakers want to get a read on indus-trial activity as quickly as possible given this sector’s role in the economy. Since it takestime to collect output figures from so many industries, much of the information arrivestoo late for the first report. Fed economists thus fill in the read more..

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    not immediately clear whether this is done to expand production capabilities or replaceaging and less-efficient equipment. Finally mergers and acquisitions also impact capac-ity because it often leads to a permanent shutdown or sale of redundant productionfacilities. So, trying to figure out the nation’s capacity utilization rate at any givenmoment is like taking a snapshot of a moving target. Yet despite these difficulties, theFederal Reserve makes a valiant effort to calculate capacity read more..

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    141Industrial Production and Capacity Utilization▲1▲24 ▼▲3▲505Baumohl_Ch03.13-03.20.qxd 8/3/04 7:38 AM Page 141 read more..

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    (4) The percent change in production for all these groups over the past year arelisted here.(5) Moving on to capacity utilization, this table shows how much spare capacity isleft at factories, mines, and utilities. In general, the utilization rate rises or fallswith the business cycle, much like industrial production. If orders for productsfade, factory output declines and less capacity is utilized. If the utilization ratelingers below 80%, it tends to discourage new business investments and read more..

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    143Industrial Production and Capacity Utilization• Table 2Industrial Production: Special Aggregates and Selected Detail(9) One important way to determine if companies are taking steps to operate moreefficiently is to see if they are investing in high-technology products. This tablehas a category labeled “selected high-technology” that measures the output ofcomputers, sophisticated office equipment, semiconductors, and related elec-tronic components. Higher output in these items reflects a read more..

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    144Chapter 3 • The Most Influential U.S. Economic Indicators▲9▲10(10) Because of the enormous influence of motor vehicle output on the manufacturingindustry, large fluctuations in this one group can greatly distort swings in industrialproduction overall. To find out how much manufacturers outside the auto industryare producing, look at the output measure excluding motor vehicles and parts.• Table 3Motor Vehicle Assemblies (11) No single industry is more closely identified with read more..

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    145Industrial Production and Capacity Utilization▲11▲12➞• Table 7Capacity Utilizationand even layoffs, while a drop in financing costs can spur purchases of motorvehicles, increase assembly line output, and fuel more economic growth. Givenits unique position in American business, the Federal Reserve has dedicated aseparate table on the output of cars and trucks produced every month.05Baumohl_Ch03.13-03.20.qxd 8/3/04 7:38 AM Page 145 read more..

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    146Chapter 3 • The Most Influential U.S. Economic Indicators(12) This is one of the most interesting tables in the entire release. When it comes tocapacity utilization rates, not all industries share the same threshold for inflation.Operating at 85% capacity might pose a serious strain for the motor vehicleindustry, but it’s unlikely to overtax the primary metals producers. Table 7 showsthe current and historical capacity utilization rates for many key industries. Thedata here can help read more..

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    INSTITUTE FORSUPPLY MANAGEMENT (ISM)MANUFACTURING SURVEYMarket Sensitivity: Very high.What Is It:First monthly report on the economy with a focus on manufacturing.News Release on Web Address:www.ism.wsRelease Time:10 A.M. (ET); released the first business day after the reportingmonth. Frequency:Monthly. Source:Institute for Supply Management.Revisions:No monthly revisions are done, but every January there arereassessments of seasonal adjustment factors read more..

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    148Chapter 3 • The Most Influential U.S. Economic Indicatorsindustrial orders. Thus, by virtue of their position, purchasing managers are in the forefrontof monitoring activity in manufacturing. That’s important because the goods-producingindustry is highly sensitive to the ebb and flow of business in the broader economy. Best ofall about the ISM’s Purchasing Managers Index is its timing. Survey results come out on thefirst business day of every month. As such, they provide the earliest read more..

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    how manufacturing is performing. The PMI is calculated as a so-called diffusion index,which shows changes in activity from month to month, but not actual levels of produc-tion. As the responses from members come in, the ISM takes the percentage of those whoreported activity being higher in each component and adds that to half the percentage ofthose who reported seeing no changes. If the result is an index number above 50, it meansthe manufacturing sector is growing. Below 50 means it’s read more..

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    • ISM Manufacturing Survey at a GlanceThe latest outcome of the Purchasing Managers Index and its components is the first tablein the report, and it’s well worth studying. The overall PMI has been effective at gaugingturning points in the business cycle and thus is closely linked to movement in the GDP.For instance, a PMI reading of 50 is believed to be consistent with real GDP growth ofabout 2.5%. Every full point in the index above 50 can add another 0.3 percentage pointsor so of growth read more..

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    151ISM—Manufacturing SurveyThe employment index series should be tracked to see if factories are laying off oractively hiring new workers. The ISM can thus foreshadow changes in employment con-ditions before the official jobs report is released. The supplier deliveries index (also known as vendor performance) deserves closemonitoring. It tracks the change in delivery times purchasing agents experience from theirsuppliers. An index figure racing into the high 50s and above means purchasing read more..

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    Customer inventories (table not shown) is also an interesting category in the ISMsurvey. Purchasing managers go on record characterizing the inventory levels of theircustomers. If they perceive those inventories to be low and the index falls below 50, itshould be viewed as a positive development. Dwindling customer inventories can becomea source of new orders in the future for manufacturers because their clients will eventu-ally need to replenish their own stock of goods to stay in line with read more..

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    Just how the market will react to the ISM depends largely on where the economystands in the business cycle. Normally, investors view a PMI consistently above 50 asbearish for fixed incomes, especially if the economy is well into its expansionary phasefor that can aggravate inflation pressures and invite higher interest rates. An index of 45to 50 is unlikely to cause much of a stir in the bond market. A reading below 45, however,could energize the bond market because it denotes serious weakness read more..

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    INSTITUTE FORSUPPLY MANAGEMENT (ISM)NON-MANUFACTURING BUSINESS SURVEYMarket Sensitivity:Low.What Is It:The first read on the economy’s service sector. News Release on Web Address:www.ism.wsRelease Time:10 A.M. (ET); released on the third business day following themonth being reported.Frequency:Monthly.Source:Institute for Supply Management.Revisions:No monthly revisions. There are yearly reassessments of seasonaladjustment factors. They are normally read more..

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    points in the economy. Nevertheless, the non-manufacturing index is a compelling indica-tor simply because it encompasses so much of the economy and provides a very currentassessment of business conditions.There are some similarities and differences between this survey and its better-knownmanufacturing cousin. Both look at the same components, such as backlog of orders, neworders, employment, new export orders, imports, prices, inventory sentiment, supplier deliveries, and inventories. However, read more..

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    Once the results are tallied, a diffusion index is employed to quantify each of the 10categories listed. Seasonal adjustments are made only for four of the 10—business activ-ity, new orders, employment, and prices.For the main Business Activity index, a reading of 50 shows the same percentage ofpurchasing managers reported higher activity as lower activity. Index values over 50 indi-cate growth, while below 50 means contraction. Since its inception in 1998, the ISM non-manufacturing Business read more..

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    CHICAGO PURCHASING MANAGERS INDEX(BUSINESS BAROMETER)Market Sensitivity:Medium to high.What Is It:Measures business activity in the Midwest region.News Release on Internet:www.napm-chicago.orgRelease Time:10:00 A.M. (ET); released on the final business day of the monthbeing covered.Frequency:Monthly.Source:National Association of Purchasing Management, Chicago affiliate.Revisions:The only revision comes from changes in seasonal adjustment factors,and it is made every January.WHY IS IT read more..

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    The Chicago NAPM queries about 200 purchasing managers spread out across aregion that includes Illinois, Indiana, and Michigan, and questions them on businessactivity in their area. Only about half of the respondents actually return their question-naires. Answers received are compiled and a diffusion index is produced based on aweighted average of the five subcomponent indexes: new orders (35% weight), produc-tion (25%), order backlogs (15%), employment (10%), and supplier deliveries (15%).Aside read more..

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    159Chicago Purchasing Managers Index▲1▲2Source: Kingsbury International, Ltd. (; NAPM–Chicago.06Baumohl_Ch03.21-03.30.qxd 8/3/04 9:18 AM Page 159 read more..

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    160Chapter 3 • The Most Influential U.S. Economic IndicatorsMARKET IMPACTThe Business Barometer report is one of those unfortunate releases whose time in thespotlight is short-lived because it’s quickly overshadowed by the national ISM story,which comes out the next business day. If the two reports diverge, market participantswill lean more on the ISM for the latest assessment of industrial activity in the country. BondsBond traders can be highly sensitive to this report because it is a read more..

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    INDEX OFLEADING ECONOMIC INDICATORS (LEI)Market Sensitivity:Low to medium.What Is It:An index designed to predict the direction of the economy. News Release on Web Address:www.globalindicators.orgRelease Time:10:00 A.M. (ET). The report is published three weeks after the endof the reporting month. Frequency:Monthly.Source:The Conference Board.Revisions:Usually minor, but can be more significant at times. WHY IS IT IMPORTANTSuppose you want read more..

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    Nonfinancial Indicators•Average hourly workweek in manufacturing (19.7%): Taken from the employmentreport. A sustained rise or fall in the number of hours worked is often a telling signof whether companies will soon hire or fire workers. •Average weekly initial claims for unemployment (2.5%): Obtained from the joblessclaims report. This series is one of the most sensitive to changing business condi-tions. Initial claims for unemployment benefits climb when the economic climatedeteriorates; read more..

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    • Interest rate spread between the 10-year Treasury bond and the federal funds rate(33%): The difference between long-term rates and the federal funds rate (overnightborrowing rates by banks) has the best track record of the 10 components in forecast-ing economic activity. This is why it has been given the greatest weight in the index.If the spread in rates increases so that long-term rates become materially higher thanshort-term rates, it’s a sign the economy is on a growth path. However, read more..

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    • Manufacturing and trade sales (11.6%): Obtained from the Business Inventoriesreport. This index, which is adjusted for inflation, reflects total spending at themanufacturing, wholesale, and retail levels.Index of Lagging IndicatorsThe lagging indicators index is based on a composite of seven measures:•Average duration of unemployment (3.8%): Taken from the jobs report. The focusof attention here is the average number of weeks individuals are out of work.Employment activity, and more read more..

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    • Ratio of consumer installment credit outstanding to personal income (20.2%):Figures taken from the personal income report and the Federal Reserve’s consumerinstallment credit series. This series looks at the relationship between consumerdebt and personal income. Whenever there is a prolonged drop in householdincome, the burden of servicing consumer debt becomes much greater. That’sbecause a larger portion of income goes to repaying IOUs. As a result, Americansproceed to cut back on read more..

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    THE TABLES:CLUES ONWHAT’S AHEAD FOR THEECONOMYJust how good is the LEI index at forecasting economic turning points? The answer dependson how high your expectations are for this or any other indicator that professes to predictfuture trends. Some experts poke fun at the LEI for predicting nine of the last six recessions.They criticize its failure to turn down prior to the 1990–1991 recession. In 1995, the indexsent out signals of an imminent contraction in economic activity that never came to read more..

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    One final note: The coincident indicator index reflects what is currently happen-ing in the economy. When you measure the change in this index over a 12-month period, it turns out to be a good proxy for GDP growth. The yearlychange in the coincident index moves in tandem with the rest of the economyabout two-thirds of the time. 167Index of Leading Economic Indicators▲1▲2Source: The Conference Board, used with permission.• Table 2Data and Net Contribution for Components of the Leading read more..

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    MARKET IMPACTYou would think that the investment community would stop everything just to hear thelatest outcome of an index whose sole purpose is to illuminate what’s ahead for the econ-omy. While the press does devote attention to the LEI index, financial market reactiontends to be subdued. The reason for the muted response is that these leading, coincident,and lagging indicators rarely surprise investors; much of the data that underlies theindexes has already been published. It doesn’t read more..

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    HOUSING STARTS ANDBUILDING PERMITSMarket Sensitivity:Medium. What Is It:Records the number of new homes being built and permits for futureconstruction. News Release on Web Address:www.census.govRelease Time:8:30 A.M. (ET); normally released two or three weeks followingthe month being covered.Frequency:Monthly.Source:Census Bureau, Department of Commerce.Revisions:Modest revisions occur for the preceding two months on housingstarts and read more..

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    such as bricklayers, carpenters, and electricians soars as well. By one estimate, for every1,000 single-family homes under construction, some 2,500 full-time jobs and nearly$100 million in wages are generated. A vibrant home-selling market also acceleratespurchases of furniture, carpets, home electronics, and appliances. Housing is thus amajor swing industry in the economy because it can affect so many diverse businesses. In this release, two key gauges on the homebuilding industry are read more..

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    on one or even two months’ worth of data. Adverse weather conditions can bring housingactivity to a standstill one month, only to have it rebound vigorously the next two monthsto make up for earlier downtime. It’s better to monitor housing activity over a three-to-four-month period to detect an underlying trend. THE TABLES:CLUES ONWHAT’S AHEAD FOR THEECONOMY• Table 3New Privately-Owned Housing Units StartedFor more than half a century, housing starts has been a very effective read more..

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    (1) Total Housing Units Started: Check the pace of total housing starts. A healthyhousing market is typically one where starts are running at a 1.5 million to 2 mil-lion unit annual range. A level that lingers close to 1 million units spells trouble forthe economy; above 2 million for an extended period and you’re likely to bump upagainst other problems, such as shortages of supplies and skilled workers.(2) Single-Family Housing Starts: There are other important measures worth noting.The read more..

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    Keep a close eye on building permits because they lead housing starts by roughlyone to three months. While the issuance of a housing permit does not automaticallyresult in new construction, the two series do go hand in hand over time. In fact, you can actually track the entire construction cycle for homes by looking atTables 1 through 5 in this release:•Table 1 records the number of permits issued for home construction by type ofhome and region of the country. •Table 2 counts the number of read more..

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    DollarForeign investors are attracted to the U.S. if they can earn a higher rate of return here rel-ative to what they can receive in other countries. Thus, a strong housing report is consid-ered bullish for the dollar because it usually supports a scenario of higher corporateprofits and a firming of U.S. interest rates. The dollar’s value can slip with weak housing data because it signals slower eco-nomic growth in the future and thus falling interest rates. Under such circumstances, read more..

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    EXISTING HOME SALESMarket Sensitivity:Medium.What Is It:Measures monthly sales of previously owned single-family homes. News Release on Internet:Existing Home Affordability Web Time:10:00 A.M. (ET); published four weeks after the month beingreported ends.Frequency:Monthly.Source:National Association of Realtors.Revisions:Monthly revisions tend to be read more..

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    to another. The problem is that it can take one to three months between the moment the ini-tial contract is signed to the time buyers and sellers finally meet to close the deal. By the timeexisting homes sales are recorded and tallied for the monthly release, market conditions inhousing could have already changed. Analysts thus have to be careful when extrapolatingdata from this economic indicator.HOW IS IT COMPUTEDThe organization that releases data on existing home sales is the National read more..

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    (2) A geographic breakdown of sales can be found for each of the four majorregions as well as their percentage changes from the previous month and year. (3) Also included is the dollar amount of homes sold nationally and by region. Suchdetail can highlight those areas in the country that are doing well in terms of realestate and regional economic activity and those that are struggling.(4) One harbinger of future housing trends is the total number of available homes onthe market for sale that read more..

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    • Sales Price of Existing Single-Family HomesShifts in housing prices reflect the changing supply and demand for homes. By andlarge, prices of existing homes march higher from year to year, though the rate ofincrease depends a great deal on the economic climate and the mix of houses sold(whether they are luxury homes versus more modestly priced residences).(6) The NAR report lists both the median (the midpoint price where half the homessold for more and the other half sold for less) and the read more..

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    • Housing Affordability IndexJust how expensive is it for Americans to buy a home? The NAR assembles a tableevery month that measures the affordability of purchasing a home given the existingeconomic climate. This series, called the Housing Affordability Index, can also befound on the NAR Web site ( this measure has virtually no impact on the stock and bond markets, it isincluded here because home purchases are the single biggest investment read more..

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    (7) The Housing Affordability Index tells whether or not a typical family can qual-ify for a mortgage loan on a typical home. A typical home is defined here as thenational median price of an existing single-family home as calculated by NAR.The outcome can be found with the columns on the right of the page. An indexvalue of 100 means that a median-income family has exactly enough to qualifyfor a mortgage on a median-priced home. An index above 100 signifies that afamily earning the median income read more..

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    NEW HOME SALESMarket Sensitivity:Medium.What Is It:Tracks the sales of new single-family homes.News Release on Web Address:www.census.govRelease Time:10 A.M. (ET); released about four weeks after the reportingmonth ends.Frequency:Monthly.Source:Census Bureau, Department of Commerce.Revisions:There are frequent revisions with the data, and they can cover thepreceding three months.WHY IS IT IMPORTANTAn abundance of economic indicators deal with housing. read more..

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    There is one other reason why top money managers examine this indicator on newhome sales closely. If consumer spending is about to change direction, you’ll see it turnhere first. Purchasing a home is the single biggest expense a household will undertake,and unless prospective buyers are content with their income, job security, and the eco-nomic outlook, many will be reluctant to buy. Should home buying begin to wane, it willset off alarm bells in many sectors of the economy. Banks will cut read more..

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    183New Home SalesThat pattern is reversed if the economy has been growing at full speed for a pro-longed period of time. Eventually mortgage rates will climb to painful levels andbegin to push many home seekers out of the market. After new and existing homessales turn down, the broad economy begins to sputter as well.2 ▼3 ▼▲ 4▲106Baumohl_Ch03.21-03.30.qxd 8/3/04 9:19 AM Page 183 read more..

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    (1) New Houses Sold: This is the headline number where you’ll find the monthlytally of new homes sold at an annualized rate for the entire U.S. and the fourgeographic regions: Northeast, Midwest, South, and West. Any discerniblechange in trend sales here can act as an early warning indicator that the economyis losing steam or gearing up for recovery. (2) New Houses for Sale at End of Period: This table provides the latest in the sup-ply of new homes being offered for sale. It stands to reason read more..

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    185New Home SalesMARKET IMPACTBondsNew homes sales tend to have the greatest impact on the fixed income market near thepeaks and troughs of a business cycle. During periods of strong economic growth, alarger-than-expected jump in new home sales can intensify alarms of inflation and thusweaken bond prices. On the other hand, if the economy were just starting to emerge fromrecession, the response by traders to a rebound in new home sales will likely be moremuted because it poses far less of an read more..

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    StocksThe volatile nature of this series and its small proportion of the residential real estatemarket keeps it from generating much excitement among equity investors. Yet, because itis widely known as a leading indicator, the new home sales series becomes more influen-tial whenever analysts suspect the economy nears a turning point. Dollar Traders in the currency markets have not shown much sensitivity to new home sales.There just isn’t much of a correlation between the performance of new read more..

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    HOUSING MARKET INDEX:NATIONAL ASSOCIATION OFHOME BUILDERS (NAHB) Market Sensitivity:Low.What Is It:Assesses the current market for new single-family home sales alongwith builder expectations of future trends. Home Web (type “HMI” in the search box) Release Time:1:00 P.M. (ET); published mid-month and covers activity for thefirst half of the same month. Frequency:Monthly.Source:National Association of Home Builders.Revisions:They tend to be minor.WHY IS IT IMPORTANTIt is read more..

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    • Rate the traffic of prospective home buyers you are seeing at new home sites. (High to very high, average, or low to very low?) The survey results are based on answers received in the first 10 days of every month.Scores are calculated using a diffusion index for each question and are adjusted for sea-sonal factors. The index has a scale that ranges from 0 to 100, where 0 means virtuallyeveryone agreed conditions were poor and 100 indicates everyone believed that condi-tions were good. An read more..

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    • Press Release on the Housing Market Index Survey results and a brief analysis of the latest HMI can be found here. The index isconsidered a good leading indicator for the other housing reports that are releasedweeks later. By looking at both the HMI and the Census Bureau’s housing starts figures, one can more accurately forecast the future demand and supplies for newhomes and even the outlook for national economic activity given the ripple effecthome buying has on the economy. 189Housing read more..

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    MARKET IMPACTBondsEconomic indicators on home construction have an impact on bonds. However, theNAHB’s Housing Market Index, despite its early appearance, appears to be overshad-owed by other, better-known government releases on building activity. These includehousing starts and new home sales, both of which are based on larger surveys. As a result,the HMI does not provoke much of a reaction in the bond market.StocksMoney managers might review the report but they generally do not trade based read more..

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    WEEKLY MORTGAGE APPLICATIONS SURVEY AND THENATIONAL DELINQUENCY SURVEYMarket Sensitivity:Medium.What Is It:Tracks the number of Americans applying for a mortgage to buy ahome or refinance an existing mortgage.News Release on Web Address:www.mortgagebankers.orgRelease Time:7 A.M. (ET); comes out every Wednesday and covers the weekending the previous Friday. A separate report, the National DelinquencySurvey, is published two and a half months after each read more..

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    economy found itself in trouble when home buying is strong. As for the refinance index,an increase in these applications often leads to greater household spending, which, inturn, fuels more economic growth.Here’s a list of the main indexes in the Weekly Mortgage Applications Survey and adescription of what they cover: 1. The Market Composite Index: This is the best indicator of total mortgage appli-cation activity. It tracks all mortgage applications during the latest week, regard-less of read more..

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    193Weekly Mortgage Applications Survey and the National Delinquency Survey• News ReleaseWeekly Mortgage Applications SurveyThe purchase index has proven to be a reliable indicator of future housing activity,especially with existing home sales, which dominate the residential real estate mar-ket. Sales of previously owned homes are counted only when the purchase closes,which is normally a month or two after the contract is signed. Therefore, a jump inthe purchase index usually means higher read more..

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    Investors study the data to gauge the condition of the U.S. mortgage market and tocheck on the credit quality portfolio of banks and other mortgage lenders. The results of the National Delinquency Survey can be found on the same MBAWeb site. By definition, the NDS looks at the percentage of all mortgages that aredelinquent and to what extent: 30 days overdue, 60 days overdue, and 90 days over-due. Normally, after 90 days, the lender can initiate foreclosure proceedings, and theMBA includes a read more..

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    CONSTRUCTION SPENDINGMarket Sensitivity: Low. What Is It:Spending on public and private construction.News Release on Web address:www.census.govRelease Time:10 A.M. (ET); released five weeks following the reported month.Frequency:Monthly. Source:Census Bureau, Department of Commerce.Revisions:Can be major. The two previous months are revised with each newrelease. In addition, there are annual benchmark changes every May that cango back two years or read more..

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    HOW IS IT COMPUTEDThe government obtains the value of residential construction directly from its own sur-veys on housing starts and new home sales. For nonresidential structures, they rely onoutside sources, such as F.W. Dodge, a division of McGraw-Hill, to contact commercialreal estate builders for the estimated dollar value of the work done. THE TABLES:CLUES ONWHAT’S AHEAD FOR THEECONOMY• Table 1Value of Construction Put in Place in the U.S.(1) Type of Construction and Amount: Private read more..

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    197Construction Spending▲106Baumohl_Ch03.21-03.30.qxd 8/3/04 9:19 AM Page 197 read more..

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    REGIONAL FEDERAL RESERVE BANK REPORTSEvery month, investors, economists, CEOs, and Washington policymakers are besiegedby a multitude of surveys that claim to measure manufacturing activity in every nook andcranny of the country. The best known ones come from the Institute for SupplyManagement (ISM) and the government’s own industrial production index. However,there are also a slew of reports published by regional Federal Reserve Banks around thecountry, and some of them are beginning to read more..

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    FEDERAL RESERVE BANK OFNEW YORK:EMPIRE STATE MANUFACTURING SURVEYMarket Sensitivity:Medium. What Is It:Tracks manufacturing activity in New York state.News Release on Web Address:www.ny.frb.orgRelease Time:8:30 A.M. (ET); released around the 15th of the month beingreported. Frequency:Monthly.Source:Federal Reserve Bank of New York.Revisions:Revisions are slight on a month-to-month basis.WHY IS IT IMPORTANTIf read more..

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    200Chapter 3 • The Most Influential U.S. Economic IndicatorsHOW IS IT COMPUTEDOn the first business day of every month, the New York Fed polls the same group of 175manufacturing CEOs or presidents. Respondents are asked to give their views on anassortment of issues and to return the completed forms by the 10th, though the forms stillmight be considered if they arrive as late as the 14th. Normally, about 100 are received ontime at the New York Fed. They are asked to describe how manufacturing read more..

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    201Federal Reserve Bank of New York▲ 1larger the index is, the greater the consensus. One problem with this report is thevolatility of these numbers. It can fluctuate wildly from month to month, which iswhy the graph can be helpful. It provides a snapshot of sentiments in the last 12months. To detect an underlying trend in the data, it is advisable to calculate 3-month and 6-month moving averages.(2) New Orders: Future production and employment in manufacturing depend onthe steady flow of new read more..

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    (4) Prices Paid: If the seeds of inflation are starting to sprout, you’ll find the firstevidence here at the manufacturing level. Factories often pass on higher produc-tion costs to wholesalers; wholesalers then transfer their additional expense onto retailers, and they, in turn, try to pass it on to consumers—that’s how house-holds often end up paying more for goods. The Federal Reserve carefully moni-tors inflation pressures at this early stage of the production process so that theycan read more..

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    MARKET IMPACTBondsKeeping ahead of the inflation and interest rate curve is the main focus of bondtraders. Thus, any fresh intelligence on the current and future state of the economy islooked upon with great interest. The Empire State Manufacturing Survey is seen inthat light—as a timely report with current news on factory activity. The key question,however, is if traders will vigorously act on it. Here the record has been spotty. Onecan safely assume that this survey will be more influential read more..

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    StocksThe equity market is also sensitive to this report because of its positive correlation withthe Philadelphia and Chicago Fed bank surveys and the ISM data. Weakness in theEmpire State indexes suggests the earnings of manufacturers are under pressure, whichcan dull stock prices. A healthy jump in the indexes at a time of economic softness willlift stock prices.DollarThere is no discernible reaction by foreign investors to this index. 204Chapter 3 • The Most Influential U.S. Economic read more..

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    FEDERAL RESERVE BANK OFPHILADELPHIA:BUSINESS OUTLOOK SURVEYMarket Sensitivity:Low to medium.What Is It:A survey of manufacturing activity in eastern Pennsylvania, southernNew Jersey, and the state of Delaware. News Release on Web Address:www.phil.frb.orgRelease Time:12:00 P.M. (ET); data is released on the third Thursday of themonth being covered.Frequency:Monthly.Source:Federal Reserve Bank of Philadelphia. Revisions:No monthly revisions take read more..

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    ▲1Responses are received by the tenth of the month, though some of the data includesthe period that bridges the current month and the previous one. All told, about half of the250 questionnaires sent out are returned on time. Scores are tabulated for each of the questions and seasonal adjustment factors areapplied. The Philadelphia Fed then comes up with a diffusion index, which is the percent-age of the positive scores minus the percentage that are negative. A zero is the breakevenpoint, where read more..

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    207Federal Reserve Bank of Philadelphia(1) Summary of Results: The BOS is considered to be one of the better indicators ofchange in the industrial sector. Though it only portrays conditions in its district,changes in the indexes can foreshadow shifts in the broader the economy aswell, especially with respect to prices and employment. Moreover, if you want aheads-up on what might appear in the “Beige Book,” the much-studied publica-tion from the Federal Reserve Board in Washington (see the read more..

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    (3) Six-Month Outlook: Also of interest in this report are the respondents’ answersto the six-month outlook. Of the 11 business indicator questions asked, two war-rant particular attention. What’s the half-year projection for capital expendi-tures? And second, will the number of manufacturing employees grow or shrinkin that time frame? Clearly these two factors are related. Manufacturers willincrease business expenditures only if they are confident that private demandhas been resuscitated. read more..

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    FEDERAL RESERVE BANK OFKANSAS CITY:MANUFACTURING SURVEY OF THE10TH DISTRICTMarket Sensitivity:Low.What Is It:Measures manufacturing activity in a region that includes Colorado,Kansas, Nebraska, Oklahoma, Wyoming, western Missouri, and northernNew Mexico.News Release on Web Address:www.kc.frb.orgRelease Time:11 A.M. (ET); report is released about two weeks after the monthbeing examined. Frequency:Monthly. Source:Federal Reserve Bank of Kansas City. read more..

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    210Chapter 3 • The Most Influential U.S. Economic Indicators• Number of employees•Average employee workweek• Prices received for finished products• Prices paid for raw materials• Capital expenditures• New orders for exports• Supplier deliveries• Inventory for raw materials and for finished goodsResponses are compiled, corrected for seasonal adjustment factors, and presented in theform of a diffusion index. That is, the percentage of those who reported a decrease for aspecific read more..

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    211Federal Reserve Bank of Kansas City▲4▲3▲2▲107Baumohl_Ch03.31-03.40.qxd 8/3/04 11:26 AM Page 211 read more..

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    MARKET IMPACTBondsPlayers in the fixed income markets follow the regional Federal Reserve Bank surveysbecause they portray economic conditions in various parts of the country. Any surprise onthe upside can make investors edgy because they can portend changes in the more influ-ential manufacturing reports, including the ISM series and industrial production. StocksEquity investors take notice but generally don’t trade on the survey results. DollarThere is no noticeable response in the currency read more..

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    FEDERAL RESERVE BANK OFRICHMOND:MANUFACTURING ACTIVITY FOR THEFIFTH DISTRICTMarket Sensitivity:Low.What Is It:Measures manufacturing performance in a region encompassing theDistrict of Columbia, Maryland, North Carolina, South Carolina, Virginia,and most of West Virginia.News Release on Web Time:10:00 A.M. (ET); report is released on the second Tuesday ofevery month and refers to events in the preceding read more..

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    moving average smoothes out the month-to-month volatility and enables one to more eas-ily spot an underlying trend. The Richmond Fed differs when it comes to recordingswings in prices paid and prices received; no diffusion index is employed here. Instead itis the actual inflation rate for the region: specifically, the average annual rate that priceshave changed in the month. The questions asked are similar to other Fed banks. They want to know about thechanges in activity in the latest month and read more..

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    MARKET IMPACTBondsA small but growing cadre of traders track the Richmond Feds survey for its ability tosniff out price pressures in the economy. StocksInvestors pay little attention to the survey. DollarCurrency traders do not follow this report. 215Federal Reserve Bank of Richmond07Baumohl_Ch03.31-03.40.qxd 8/3/04 11:26 AM Page 215 read more..

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    FEDERAL RESERVE BANK OFCHICAGO:NATIONAL ACTIVITY INDEX (CFNAI) Market Sensitivity:Low.What Is It:A nationwide measure of economic activity and inflation pressures. News Release on Web Address:www.chicagofed.orgRelease Time:10 A.M. (ET); usually released four to five weeks after thereporting month. Frequency:Monthly.Source:Federal Reserve Bank of Chicago.Revisions:Substantial revisions can occur in the monthly data.WHY IS read more..

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    By using a weighted average involving all 85 measures, a single index figure is computedso that a value of 0 indicates the economy is growing at its full potential. In other words,business is humming along at the fastest pace possible without aggravating inflation pres-sures. This is known as trend growth. A value above 0 indicates the economy is expand-ing at a rate above its safe speed, with total demand outstripping supplies to such anextent that it can lead to an outbreak of inflation. An read more..

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    218Chapter 3 • The Most Influential U.S. Economic Indicators▲1MARKET IMPACTFew participants in the financial markets follow this indicator. That could change in thefuture as investors begin to take note of its usefulness as a forecasting tool.07Baumohl_Ch03.31-03.40.qxd 8/3/04 11:26 AM Page 218 read more..

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    THE FEDERAL RESERVE BOARD’S BEIGE BOOKMarket Sensitivity:Medium.What Is It:A summary of economic conditions around the country compiled forthe Federal Reserve Board.News Release on Web Address:www.federalreserve.govRelease Time:2:00 P.M. (ET); released two Wednesdays before each FOMCmeeting.Frequency:Eight times a year.Source:Federal Reserve Board.Revisions:None.WHY IS IT IMPORTANTAmong the most important determinants of future U.S. economic read more..

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    watchers,” has emerged over the years. Their job is to pick up every possible nuance fromspeeches, side comments, and writings by FOMC members that might tip off how theywill vote at the next interest rate policy meeting. So far the track record of “Fed watch-ers” has been less than stellar, which is of little surprise. As famed economist JohnKenneth Galbraith once said, “There are two types of interest rate forecasters. Those whodon’t know, and those who don’t know they don’t read more..

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    THE TABLES:CLUES ONWHAT’S AHEAD FOR THEECONOMYSince there are no tables in the Beige Book, the question becomes whether one can divinefrom the anecdotes and summary how the Fed might rule on interest rates. The shortanswer is no. The Beige Book is not a good leading indicator of interest rates or anythingelse for that matter. Still, it’s the only game in town that permits outsiders to know whatFed governors will be reading as they prepare to discuss whether to change the bench-mark Federal read more..

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    BondsWidespread anecdotal signs of a softening in the economy are considered bullish forfixed incomes because it might move the Fed closer to lowering interest rates. On theother hand, reports of strong business activity and tight labor markets will likely depressbond prices and raise interest rates because investors expect the central bank to interveneand cool the economy. StocksIf the Beige Book portrays a soft economy with little inflation pressures, equity investorsmight look to the Fed to read more..

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    INTERNATIONAL TRADE INGOODSANDSERVICESMarket Sensitivity:Medium.What Is It:Monthly report on U.S. exports and imports of goods and services.News Release on Web Address:www.bea.govRelease Time:8:30 A.M. (ET); data is released the second week of the month andrefers to trade that occurred two months earlier. Frequency:Monthly.Source:Census Bureau and Bureau of Economic Analysis, Department ofCommerce. Revisions:Each release comes with read more..

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    following section on the Current Account), which is released quarterly and covers not onlytrade in goods and services, but also foreign investment entering the U.S. and the amountof investment capital flowing out of the U.S to other countries. Though both of thesereports are valuable economic indicators, investors pay more attention to the monthly tradedata since it’s more current. The international transaction account comes out every threemonths; by then, much of the news is considered quite read more..

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    the flip side, a falling U.S. currency makes imports more expensive and Americans mightthink twice about purchasing foreign goods. The upside of a weaker dollar is that it low-ers the price of American exports in foreign markets, which can increase overseasdemand for U.S. goods and services. Thus, changes in exchange rates over time have aprofound affect on international commerce.Finally, it should be noted that differences in inflation rates among countries couldalso influence trade patterns. A read more..

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    value, which means the price of the commodity includes freight transport, insurance, andother charges connected with shipping the goods to the U.S. port of exportation. Imports,however, are valued on a “customs basis” (CIF), which is essentially the price of theproduct without the cost of insurance, freight, or import duties.Trade in services is handled differently. Here the Commerce Department dependsentirely on monthly surveys taken by businesses and associations in the service sector read more..

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    When it comes to trade in services, the story is slightly different. Service transactionsrarely show much fluctuation. They usually grow at a stable rate month to month. Byand large, the U.S. market faces little competition in services which is why inflationtends to rise faster in this sector. (Let’s face it—American dentists know that they canincrease their fees without fear of losing their patients to dentists in Spain.) 227International Trade in Goods and read more..

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    • Exhibit 2U.S. International Trade in Goods and Services—Three-MonthMoving Averages(3) Like many economic indicators, trade can be subject to periodic distortions. Asharp swing up or down in petroleum prices in a single month can exaggeratethe overall trade picture. Large auto shipments from overseas might on occa-sion cause statistical shocks too. To smooth out such month-to-month volatil-ity, the government presents trade data in what is described as centeredthree-month moving averages. read more..

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    To gain some additional perspective on trade, separate tables are broken out for two ofthe most volatile commodities: energy and motor vehicle imports. Exhibit 17 isdevoted to imports of petroleum and petroleum products, and Exhibit 18 focuses onmotor vehicle imports and exports. Both will be discussed in more detail. • Exhibit 17Imports of Energy-Related Petroleum Products, IncludingCrude OilEven though the U.S. is one of the world’s largest producers of oil, it still suppliesless than half read more..

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    (4) This column lays out the average cost of oil per barrel imported into the U.S. forthe latest month. (5) Here one finds the quantity of oil imported to the U.S by month.(6) This is the monthly bill for importing crude. (7) Located in this column is the total monthly cost of crude oil, plus other energy-related imports, including liquefied propane and butane gas. For purposes of comparison, all this data is also presented on a historical basis thatgoes back more than 18 months.• Exhibit read more..

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    231International Trade in Goods and Services07Baumohl_Ch03.31-03.40.qxd 8/3/04 11:26 AM Page 231 read more..

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    232Chapter 3 • The Most Influential U.S. Economic Indicators• Exhibit 10Real Exports and Imports of Goods by Principal End-UseCategory (Adjusted for Inflation) (Not Shown) It is best to look at trade in real terms. This is the only way one can determinechanges in the actual volume of goods traded. It strips away the distortive effects ofprice inflation and gives you a picture of the quantity of goods and services traded.Exhibit 10 adjusts both exports and imports for inflation, but only for read more..

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    233International Trade in Goods and Services07Baumohl_Ch03.31-03.40.qxd 8/3/04 11:26 AM Page 233 read more..

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    • Exhibit 14Exports, Imports, and Trade Balance by Selected Countriesand Areas234Chapter 3 • The Most Influential U.S. Economic Indicators07Baumohl_Ch03.31-03.40.qxd 8/3/04 11:26 AM Page 234 read more..

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    • Supplemental Section: Exhibit 6-aExports, Imports, and Trade Balanceby Country and Area (Not Shown)Both these tables show U.S. trade patters with individual countries. Exhibit 14records U.S. trade with three dozen of its major trading partners. If you want a more detailed country-by-country breakdown, Exhibit 6-a (located in thesupplemental section of the release) shows trade between the U.S. and virtually everynation in the world. A chronic trade imbalance with certain countries can not read more..

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    Now suppose that the trade deficit suddenly balloons. You might conclude that is badnews for bond investors. After all, this would normally put downward pressure on thedollar, which might raise both inflation and interest rates in the U.S. An increase in thetrade shortfall means that the U.S., which is already the world’s largest debtor nation, willhave to borrow even more money from foreign investors to finance these additionaldeficits. Ah, but there might also be good news here for bonds. A read more..

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    CURRENT ACCOUNT BALANCE(SUMMARY OFINTERNATIONAL TRANSACTIONS)Market Sensitivity:Low to medium.What Is It:The broadest accounting of America’s trade and investmentrelationship with the rest of the world.News Release on Web Address:www.bea.doc.govRelease Time:8:30 A.M. (ET); data is released two and a half months after thereference quarter ends. Frequency:Quarterly.Source:Bureau of Economic Analysis, Commerce Department.Revisions:Usually moderate. Annual read more..

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    Let’s take a look at the international transactions release and see how all of this infor-mation is laid out. The report is divided into two sections. The first deals with the CurrentAccount, which includes the merchandise trade, services, investment income flows, andunilateral transfers. The second part is titled the Capital and Financial Accounts, whichtracks the movement of actual investments and loans into and out of the U.S.Current AccountThe current account balance summarizes the net read more..

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    The contribution that each of the components makes in the current account breaks downas follows (based on 2002 data):Total Exports of Goods, Services, and Investment Income100%(+)Exports of Goods55%Exports of Services24%Income Receipts21%Total Imports of Goods and Services and Income Payments100% (–)Imports of Goods70%Imports of Services14%Income Payments16%Unilateral Transfers (Net)100% (–)U.S. Government Grants29%U.S. Government Pensions and Other Transfers8%Private Remittances and Other read more..

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    Taken together, the current account and the financial and capital accounts make upAmerica’s balance of payments, which represents all economic transactions between theU.S. and the rest of the world. So how does the U.S. stack up in its trade and financial affairs? Not too well!Americans love to spend and borrow, even if it is beyond their means to do so. Since the1980s, the U.S has consistently consumed far more than it produces, which meansAmericans increasingly rely on imports to satisfy read more..

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    241Current Account Balance07Baumohl_Ch03.31-03.40.qxd 8/3/04 11:26 AM Page 241 read more..

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    dangerous the unending stream of current account deficits is to the future health of theU.S. economy. Many are raising alarms that if the red ink continues, sooner or later for-eign creditors will decide to lessen their exposure to the U.S. economy and its stock andbond markets. The consequences of such a step could be disastrous. The dollar could dra-matically weaken, and both inflation and interest rates will be driven higher.Others argue that while these deficits cannot go on indefinitely, read more..

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    • Table 1U.S. International Transactions—Capital and Financial Accounts243Current Account Balance07Baumohl_Ch03.31-03.40.qxd 8/3/04 11:26 AM Page 243 read more..

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    Line 40. Net U.S.-owned assets abroad: Americans frequently buy and sell assets inother countries. This line tells the change in the amount of foreign assets held by theU.S. government and private Americans.Line 50. Net U.S. private assets: Here you’ll find the net change in the private owner-ship of assets outside the U.S. This is further segmented into two groups: direct invest-ments (as in buying a foreign company or factory) and foreign securities on lines 51and 52, respectively. Line 55. read more..

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    CONSUMER PRICE INDEX (CPI) Market Sensitivity:Very high.What Is It:Most popular measure of price inflation in retail goods and services. News Release on Web Time:8:30 A.M. (ET); released the second or third week following themonth being covered.Frequency:Monthly. Source:Bureau of Labor Statistics, Department of Labor.Revisions:No monthly revisions. Only annual changes are introduced inFebruary with the release of the January CPI data. read more..

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    What exactly is the CPI? It measures the average change in retail prices over time fora basket consisting of more than 200 categories of assorted goods and services. These cat-egories are then divided into eight major groups. Each group is given a weight that repre-sents its importance in the CPI calculation. The weights are determined by surveyingthousands of families and individuals about what they actually bought in 2001 and 2002.Every two years, these weights get revised to adjust for read more..

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    average price in the basket has been assigned a value of 100. Thus, if the CPI index stoodat 200 at the end of the year and increased in the first six months of the following year to202, inflation rose 1% in the first half of the year, or, if you annualize it, prices jumped ata 2% rate.How does inflation get started in the first place, and is it really all that bad for theeconomy? There are two popular explanations for what causes inflation. One is based onthe Monetarist view that excessive read more..

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    The only time inflation is deliberately sought is when an economy comes face toface with the threat of deflation, a phenomenon where prices across the board spiraldownward. To be sure, falling prices initially sound great to shoppers. But make nomistake—deflation can be as destructive to an economy as inflation. Tumbling pricesslash corporate profits, which, in turn, can lead to job layoffs. Higher unemploymentreduces household income, and that causes a retrenchment in consumer spending. read more..

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    CPI-W Versus CPI-UAfter receiving the raw data and subjecting it to seasonal adjustment factors, the BLSthen comes up with inflation figures for two different population groups. One index iscalled the CPI-W (with the “W” standing for wage earners and clerical workers). It cov-ers 32% of the working population. While only one in three employees is covered, theCPI-W is still important to monitor because it’s the benchmark used to figure out payincreases in collective bargaining agreements read more..

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    • Table APercent Changes in CPI for Urban Consumers (CPI-U)Every CPI release has two headline inflation numbers.(1) All items: There is the monthly percentage change in the CPI for all items. (2) Core-CPI: This subset, known as core-CPI, is what the CPI would be if food andenergy costs were excluded.Why subtract the food and energy components? Because the two items, whichaccount for nearly 25% of the CPI, bounce around quite a lot month to monthdue to temporary factors such as crop failures or read more..

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    • Table 1Consumer Price Index for All Urban Consumers (CPI-U): U.S. CityAverage, by Expenditure Category and Commodity and Service GroupAside from the headline CPI number, it’s helpful to look at how inflation has behavedfor individual commodities and services. That’s where the next two tables come in. 251Consumer Price Index▲407Baumohl_Ch03.31-03.40.qxd 8/3/04 11:26 AM Page 251 read more..

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    (4) Medical care: One of the biggest expenses for companies is paying for employeehealth care coverage. Firms planning their future budgets will want to set aside anamount for such expenditures, but how much? Executives can approximate suchcosts by looking at the medical care component in the CPI release, which itself isdivided into four categories, including professional and hospital services.Monitoring the previous pace of price changes in these subcategories gives yousome sense of where such read more..

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    the inflation rates by geographic regions and by population-size areas. Why canthis table be helpful? If you’re interested in relocating your factory or are aretiree seeking out a community with a lower cost of living, you can comparethe rates of inflation for each of these regions and draw some conclusions aboutfuture price changes there. In addition to the areas listed in this table, the BLSpublishes semi-annual inflation rates of more than a dozen other metropolitancommunities in its read more..

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    MARKET IMPACTBondsAn unexpected jump in the CPI can slash of bond values and propel yields higher. Bondlosses are likely to be even worse if the core-CPI surges as well, because it represents adeterioration in the underlying rate of inflation. Conversely, a benign CPI report showinglittle or no inflation is bullish for fixed income securities, with bond prices generally ris-ing and interest rates easing.StocksEquity investors also detest sharp increases in the CPI, especially core-CPI, because read more..

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    PRODUCER PRICE INDEX (PPI) Market Sensitivity:Very high.What Is It:Measures the change in prices paid by businesses.News Release on Web Address:www.bls.govRelease Time:8:30 A.M. (ET); announced two weeks after the reporting month ends.Frequency:Monthly.Source:Bureau of Labor Statistics, Department of Labor.Revisions:The monthly data is subject to one revision which is published fourmonths later. Annual revisions are published in February with the Januarydata, and it read more..

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    256Chapter 3 • The Most Influential U.S. Economic IndicatorsPPI Intermediate GoodsThe intermediate goods index reflects the cost of commodities that have undergone tran-sitional processing before becoming the final product. Items like flour, certain animalfeeds, paper, auto parts, leather, and fabric fall into this category. Again, changes in priceshere can be transferred to the final stage, which is finished goods.PPI Finished GoodsThe finished goods index is the most closely watched measure read more..

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    A basket is formed of goods representing items at all stages of production: crude, inter-mediate, and finished. Which commodities are selected for the basket and what weighteach has in the PPI depends on how much revenue these goods generate in the economy.The weights are reviewed and modified every five years or so to reflect changes in whatindustries are selling. Currently, the weights are determined based on sales patterns seenin 1997. The next change in weights will take place in 2005. read more..

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    (2) A longer-term perspective is a better way to view the PPI numbers. Table A listshow producer price inflation for finished goods has performed over the last 12months. Corresponding annual changes for crude and intermediate levels arefound in Table B of the report.258Chapter 3 • The Most Influential U.S. Economic Indicators• Table BMonthly and Annual Percent Changes in Selected Price Indexesfor Intermediate Goods and Crude Goods(3) Here one can find the yearly changes in producer prices read more..

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    Here we see the monthly price changes for core-crude goods and for core-intermediate goods. (Price movements for core-finished goods are in Table A.)259Producer Price Index• Table 1Producer Price Indexes and Percent Changes by Stage of Processing(5) To view how core-producer prices have performed over the last year and not justthe previous month, one has to go to Table 1. Here’s where the figures get inter-esting. One of the best but least followed leading economic indicators of U.S.and read more..

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    260Chapter 3 • The Most Influential U.S. Economic Indicators▲508Baumohl_Ch03.41-03.47.qxd 8/3/04 10:44 AM Page 260 read more..

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    While the core rate of producer prices can tell you something about future infla-tion pressures, one should not totally ignore the food and energy components.After all, those two commodities are, in the final analysis, essential to the U.S.economy. So a general rule is to look at the core rate to detect month-to-monthchanges in inflation. But when making longer projections of economic growthand inflation, the core rate becomes less meaningful since we ultimately pay forfood and energy. Thus, the read more..

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    EMPLOYMENT COST INDEXMarket Sensitivity:Medium to high.What Is It:The most comprehensive measure of labor costs.News Release on Web Address:www.stats.bls.govRelease Time:8:30 A.M. (ET); released the last Thursday of April, July, October,and January.Frequency:Quarterly. Source:Bureau of Labor Statistics, Department of Labor. Revisions:Not on a quarterly basis. Revisions are announced annually with therelease of first quarter data, and the read more..

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    To be fair, companies can respond to higher labor costs in ways other than raisingprices. Firms might choose to absorb the extra expense and grudgingly accept lessprofits for the time being. Or they can decide that given how expensive labor hasbecome, it makes more sense to simply let go a large number of employees andinstead invest in new technology that would permit the same or even greater outputbut with fewer workers. Lastly, companies can simply decide to relocate their produc-tion read more..

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    Changes in wages and salaries, as well as the cost of benefits, are then converted intoan index (beginning with an index reference of 100 to reflect labor costs in 1989). Thus,if compensation costs stood at 150 at the end of one year and then rose to 160 by theclose of the following year, labor costs increased by 6.7% over those 12 months. Thereare separate indexes in this report to show how these expenses changed in the private andpublic sectors, by labor union status, among industrial and read more..

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    • Table B12-Month Percent Changes in Employment Cost Index(1) Is the economy facing inflation pressures? It’s simple enough to find out. Takethe annual percentage change in compensation costs for private industry andcompare it with the annual change in non-farm productivity (see the section onProductivity and Costs) for the comparable period. Ideally, you want to seeannual compensation costs rise no faster than the pace of annual productivitygrowth. Companies showing steady improvements in read more..

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    • Table 4Employment Cost Index for Total Compensation for PrivateIndustry Workers, by Bargaining Status, Region, and Area(2) Highlighted here are the growth differences in compensation costs betweenunion and nonunion workers. (3) Interested in finding which region of the country shows the greatest increase ordecrease in total compensation? The report segments labor cost changes by geo-graphic area, quarterly and annually. 266Chapter 3 • The Most Influential U.S. Economic read more..

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    MARKET IMPACTBondsBond traders react to the ECI much like they do for any forerunner of inflation. A larger-than-expected jump in the index is disconcerting to these investors and can provokeenough sales of fixed income securities to significantly drive up yields. Investors fear thatrising labor costs without a concurrent increase in productivity can fire up price pressuresand eventually force the Fed to raise interest rates before wage inflation firmly sets in. Astable or weaker-than-expected read more..

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    IMPORT ANDEXPORT PRICESMarket Sensitivity:Low.What Is It:Records price changes of goods bought and sold by the U.S. inforeign markets. News Release on Web Address:www.bls.govRelease Time:8:30 A.M. (ET); data is released around two weeks after thereported month.Frequency:Monthly.Source:Bureau of Labor Statistics, Department of Labor. Revisions:Each release contains monthly revisions and corrections that go backthree months. Changes affecting the weights of products in read more..

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    products being purchased or because foreigners raised prices. The same applies toexports. If the value of U.S. shipments to other nations increased from one period to thenext, was it because American firms actually sold more goods, or did they just hikeprices? By using the information from this report, analysts can determine the real volumeof imports and exports traded.HOW IS IT COMPUTEDEvery month, information on export and import prices is collected on more than 20,000products from over 6,000 read more..

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    (2) Generally, a pickup in export prices, if sustained, can hurt U.S. foreign sales, leadto lower employment in this country, and curb economic growth. However, thereare a couple of caveats here. Much depends on how badly the rise in the price ofU.S.-made goods hurts American competitiveness overseas. Often it will, espe-cially if there are ample foreign suppliers offering similar quality products morecheaply. On the other hand, U.S. companies might successfully hold on to theirforeign customers read more..

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    The dominant factor behind changes in import and export prices is the rise and fall ofthe dollar’s value in the currency market. A strengthening dollar reduces the price ofimports, but makes U.S. exports more expensive in foreign markets. A depreciating dollarraises the cost of import costs. The flip side is that American exporters have an easiertime getting foreign orders because their products drop in price outside the U.S. Here’s anillustration of how changes in export and import prices read more..

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    Importers and American consumers, on the other hand, are happy to see a musculardollar because foreign products are now cheaper. When the value of the U.S. currencystrengthened from U.S. $1 = 1 euro to U.S. $1 = 1.25 euros, the bottle of French winefor Americans fell from $25 to $20. However, what’s great for U.S. shoppers can beawful for domestic producers, who now have to compete with lower-priced foreigngoods entering this country. These American companies are thus now under immensepressure read more..

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    273Employment Cost IndexMARKET IMPACTBondsThe release on import and export prices is not a major market mover, though participantsin the fixed income market might find some forward-looking signs of inflation pressures,or the lack thereof. Higher import prices can potentially unnerve bond investors who arehypersensitive to even the slightest scent of rising inflation. In contrast, a decline in theprice of imports will help keep inflation under control, though this report alone isunlikely to read more..

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    StocksHere, too, any response to this report is likely to be modest. That’s not to say it’s of minorimportance to equity investors. Corporate profitability is very much affected by bothimport and export price movements. If the cost of imports drops, some U.S. firms, specif-ically those that buy product components from other nations, stand to gain because itlowers production costs. Others will suffer from cheaper imports as foreign competitorsthreaten to grab a bigger share of the American read more..

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    PRODUCTIVITY ANDCOSTSMarket Sensitivity:Medium.What Is It:Measures changes in the efficiency of workers who produce goodsand services. News Release on Web Address:www.bls.govRelease Time:8:30 A.M. (ET); the initial report is released about five weeksfollowing the end of the quarter.Frequency:Quarterly.Source:Bureau of Labor Statistics, Department of Labor. Revisions:Can be substantial. This first revision appears a month after thepreliminary figures, and a second read more..

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    That last point was painfully learned back in the 1970s and early 1980s, when pro-ductivity growth was close to flat-lining. The U.S. economy at the time was reeling fromsoaring energy costs and several deep recessions. Moreover, American firms were losingcustomers overseas as well and in the United States as foreign competitors charged on tothe scene with less-expensive, often better-quality cars, appliances, home electronics, andother products. Once overly confident that no nation could read more..

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    equipment that the need for labor significantly diminished. This prompted many to wonderwhether the U.S. economy was now operating under a new paradigm where future increasesin output can be achieved more easily and cheaply by relying on domestic and foreign capital(such as high-tech equipment, modern assembly lines, and outsourcing production) ratherthan by hiring more U.S. workers.If true, this sounds wonderful to companies because they can satisfy consumerdemand with a smaller, less costly, read more..

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    Suppose compensation per hour jumps by 3%, but labor productivity (output per hour)increases only 2%. In that case, the cost of labor (or unit labor costs) rises by 1%.There isa close statistical correlation between changes in unit labor costs and the behavior of con-sumer prices in the future. If unit labor costs ratchet up, prices at the retail level will even-tually climb too.Let’s assume that instead of labor productivity increasing 2%, it actually jumps by 4%.Now, with labor output per read more..

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    (1) The second column, formally labeled output per hour of all persons, is the bestoverall indicator of the economy’s efficiency. It records the percentage change inlabor productivity from one quarter to the next as well as over the past year.Labor productivity is considered a leading indicator of inflation in the economy.Higher output per hour is essential if the economy is to grow rapidly withoutinciting inflation.To figure out just how fast the economy can expand before inflationary read more..

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    280Chapter 3 • The Most Influential U.S. Economic Indicators▲12 ▼08Baumohl_Ch03.41-03.47.qxd 8/3/04 10:44 AM Page 280 read more..

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    MARKET IMPACTBondsFixed income traders rarely get excited at quarterly releases, even for one as importantas productivity. That’s because some of the components, such as output and hoursworked, have already been published in separate reports. Still, reaction in the bondmarket to the productivity report might vary, depending on how inflation and laborcosts have been behaving in the background. The primary point here is that higher pro-ductivity levels keep inflation in check. However, a fall in read more..

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    EMPLOYER COSTS FOREMPLOYEE COMPENSATIONMarket Sensitivity:Low.What Is It:Measures dollar cost per hour of having an employee on payroll.News Release on Web Address:www.bls.govRelease Time:10 A.M. (ET); released nearly three months after the end of thereported quarter.Frequency:Quarterly.Source:Bureau of Labor Statistics, Department of Labor.Revisions:No revisions.WHY IS IT IMPORTANTFor years, economists have been clamoring for more information read more..

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    HOW IS IT COMPUTEDThe ECEC is based on a population survey involving both the private and public sector(local and state only; the federal payroll is excluded). Every quarter, the Bureau of LaborStatistics makes inquiries into labor costs at about 8,500 establishments in private indus-try involving 37,300 occupational observations. It also includes 800 establishments instate and local governments, public schools, and public hospitals covering 3,700 occupa-tional groupings. The surveys are read more..

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    • Table 1Employer Costs Per Hour Worked for Employee Compensationand Costs as a Percent of Total CompensationWant to know how much it costs on average for companies to have employees?You’ll find all the key compensation figures in this table, along with their percent-age of total labor expenses. For example, in June 2003, average total compensation(pay and benefits) for civilian workers came to $24.19 per hour. The table thenbreaks down that amount to show its two components: wages and read more..

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    This first table, however, is quite broad in that it encompasses all civilian workers inboth private industry and state and local governments. Subsequent tables in this 24-pagereport, while not included in this book, list the costs for different segments of the activeworkforce. For example, Table 2 in the release shows labor costs in dollars for differentoccupational and industry groups. Table 5 compares the compensation costs for union versus non-union employees. Table 6 records labor expenses read more..

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    REAL EARNINGSMarket Sensitivity:Low.What Is It:Measures the change in worker earnings after adjusting for inflation. News Release on Web Time:8:30 A.M. (ET); published in the middle of the month the sameday the CPI is released and refers to earnings in the previous month. Frequency:Monthly.Source:Bureau of Labor Statistics, Department of Labor.Revisions:Changes are made monthly and are the result of revisions in read more..

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    HOW IS IT COMPUTEDData on average weekly earnings is collected from the monthly jobs release (see the sec-tion on Employment Situation), specifically the payroll reports of private non-farm estab-lishments. Only workers holding full-time and part-time production and non-supervisoryjobs, which represent more than two-thirds of the total workforce, are included here. Toget the real average weekly earnings, economists take the current dollar earnings for theweek and adjust it for changes in the read more..

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    • Table BPercent Change in Earnings from the Same Month a Year Ago(2) If you want to spot a pattern in real income growth, it’s best to look at this table.Here you’ll find the percentage change in real average hourly earnings and realweekly earnings over the past 12 months for each month. The information helpsinvestors and economists forecast consumer expenditures and might even serveas an indicator of future labor turmoil, especially if there is a sustained declinein real earnings. read more..

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    YIELD CURVEMarket Sensitivity:Low to medium.What Is It:Yields on Treasury securities from short to long term maturities.Web available.Source:Treasury markets.WHY IS IT IMPORTANTWhen it comes to predicting the future course of the economy, only one indicator standsabove all others in terms of accuracy: the yield curve. No other measurement has demon-strated as much success in warning of read more..

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    If a normal yield curve consists of a very gradual increase in interest rates over time,a steep yield curve is an extreme version of that with yields climbing to higher levelsmuch more rapidly than on a normal curve (see Chart B).290Chapter 3 • The Most Influential U.S. Economic Indicators08Baumohl_Ch03.41-03.47.qxd 8/3/04 10:44 AM Page 290 read more..

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    This can occur when the economy is starting to pick up speed, causing fresh anxi-eties that inflation can become more problematic in the near future. Such worries mightprovoke investors into selling longer-term Treasury securities, especially if they believethe Federal Reserve is moving too slowly to contain emerging price pressures. This willdepress bond prices and drive longer-term yields higher. (On the other hand, if the Fed isperceived to be acting quickly to preempt an outbreak of read more..

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    Since 1960, all six U.S. recessions have been preceded by an inverted yield curvemonths in advance. HOW IS IT COMPUTEDPlotting a yield curve is easy enough. Several major newspapers (New York Times, WallStreet Journal, and Investor’s Business Daily) as well as numerous financial sites on theInternet (see the Web locations at the beginning of this section) have a table listing thelatest yields on Treasury debt. You don’t have to graph them to determine whether theslope of the curve is normal, read more..

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    A normal yield curve will have a spread, which is the difference in yield between the 30-year bond and the short 3-month bill, of about two and half percentage points. Anythinggreater than that would be considered a steep yield curve. A flat curve is where they allhuddle close to the same rate, and an inverted curve is whenever the 3-month bill rate ishigher than that of the 10- or 30-year bond. A key point to appreciate is that while theFederal Reserve sets yields at the shortest end of the read more..

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    StocksThe equity market has not taken the yield curve seriously, despite its proven forecastingrecord. This is surprising because stock prices are based on expectations of future corpo-rate earnings and overall business activity, both of which can be foreseen by the behaviorof the yield curve. Indeed, studies have shown that the yield curve can serve as an effec-tive market-timing strategy, yet it remains underappreciated among portfolio managers. DollarForeign investor reaction to a flat or read more..

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    C HAPTER4International Economic Indicators:Why Are They So Important? U.S. economic indicators help us understand what is happening in the domestic economy.However, being a successful investor or an effective corporate leader in today’s highlyintegrated global economy requires a knowledge of what is going on beyond U.S. borderstoo. A CEO who wants to sell products overseas or an investor who seeks to achievehigher returns on stocks and bonds should be familiar with indicators that gauge read more..

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    296Chapter 4 • International Economic Indicators: Why Are They So Important?Given the risks currencies pose, wouldn’t it make more sense to simply shy awayfrom international markets? Absolutely not. There is nothing inherently mysterious aboutthe movement of the dollar, euro, yen, British pound, or any of the other major free-floating currencies in the foreign exchange markets, for ultimately, the long-term value ofa currency is determined by a country’s economic fundamentals. Is the read more..

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    fair, nor did the U.S. do as poorly as other foreign markets in 2000 following the dot.commarket collapse. What all this boils down to is the importance of keeping an open mindabout the profits and perils that come with international investments. No one can predictwith certainty which economies and financial markets will outperform others. But thereshould be no dispute that the virtues of diversifying investments abroad remain as validas ever. The purpose of this chapter is to bring the reader read more..

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    GERMAN INDUSTRIAL PRODUCTIONRank:1stWhat Is It:Industrial output in Europe’s largest economy.News Release on Home Web Address:www.destatis.deRelease Time:11 A.M. (Continental time); released the second week of themonth and refers to activity two months earlier (so March data describesproduction in January). Frequency:Monthly. Source:Federal Statistics Office, Germany (Statistisches Bundesamt,Deutschland).Revisions:Revisions can occur with each read more..

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    299German Industrial Production09Baumohl_Ch04.qxd 8/3/04 2:59 PM Page 299 read more..

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    GERMAN IFO BUSINESS SURVEYRank:2nd.What Is It:German business leaders assess the current and future economicclimate. News Release on Internet:www.ifo-business-climate-index.infoHome Web Address:www.ifo.deRelease Time:10 A.M. (Continental time); published the fourth week of thesurvey month. Frequency:Monthly.Source:IFO Institut für Wirtschaftsforschung (IFO Institute for EconomicResearch). Revisions:Tend to be rare. Periodic revisions occur as a result of changes inseasonal adjustment factors. read more..

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    activity in Germany as a whole. Economists at the IFO believed the business cycles forthese two regions had by now largely converged, even though they were still operating atdifferent output levels. Thus, the IFO Business Climate Survey now publishes a unitedGerman series for its headline index. Those who still want to see separate performancedata for western and eastern Germany can do so by searching the more detailed IFO data-base on its Web sites.Finally, it is interesting to note that the read more..

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    GERMAN CONSUMER PRICE INDEX (CPI) Rank:3rd.What Is It:The main price inflation gauge for Europe’s largest economy. News Release on Web Time:7 A.M. (Continental time); the preliminary CPI is publishedaround the 25th of every month. Final figures are released two weeks later. Frequency:Monthly.Source:Federal Statistics Office Germany (Statistisches BundesamtDeutschland).Revisions:Monthly report on read more..

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    zero tolerance for the slightest whiff of inflation beyond 2% a year. It made no differ-ence whether their economy was weak or unemployment was sky high. The primarymandate of the central bank was to keep inflation close to zero and protect Germany’scurrency, the Deutsche Mark, at all costs, even if it meant lifting and holding rates atpainfully high levels. While Germany’s dogged defense against inflation contributedto years of chronically high joblessness, it also made its currency one of read more..

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    Another virtue of the German CPI is how current it is. The government puts out a pro-visional estimate of inflation the same month as the survey. A final CPI is publishedtwo weeks later between the 10th and the15th of the following month. It is the provi-sional figures, though, that traders in the financial markets react to the most becausethe difference between the preliminary German CPI and the revised numbers tends tobe negligible.Without meaning to complicate this subject, it is necessary to read more..

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    306Chapter 4 • International Economic Indicators: Why Are They So Important?JAPAN’S TANKAN SURVEYRank:4th.What Is It:A widely respected report on business confidence in Japan.News Release on Web Time:8:50 A.M. (local time); results are published at the start of April,July, and October, and in mid-December.Frequency:Quarterly.Source:Bank of Japan.Revisions:Statistical corrections are rare. Revisions merely read more..

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    Respondents are asked to respond to seven broad questions:• Business conditions (favorable or unfavorable?)• Supply and demand conditions (excessive demand or excessive supply?) and prices(rising or falling?)• Sales and current profits (% change)• Fixed investment (% change)• Employment (excessive employment or insufficient?) • Corporate finance (easy or tight monetary conditions?)• Overseas activities (% change) Of the seven topics, four seek qualitative assessments that require a read more..

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    • Business Conditions at Small Enterprises(3) Are all businesses benefiting from economic growth or just a few? How wide-spread is the recovery inside Japan? By comparing the sentiment levels of largeand small companies, one can tell whether businesses across the board are see-ing an improvement in sales and profits—or if these gains are limited to mainlylarge enterprises. • Average Exchange Rates Predicted by Large Manufacturers(4) Where the yen is valued in relation to other currencies read more..

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    310Chapter 4 • International Economic Indicators: Why Are They So Important?• Production Capacity(7) Lots of unused factory capacity poses problems for an economy. It willdepress future business spending and perhaps even lead to plant closings andlayoffs. In contrast, a reduction in excess plant capacity suggests that customerorders are rising and more factories are being utilized to satisfy this demand.The diffusion index shows the net percentage of companies that claim to havetoo much read more..

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    311Japan’s Tankan SurveyAs rich as the Tankan survey is with information on the private business sector inJapan, there are two cautionary points to consider. Since the powerful Bank of Japan isbehind this report, the firms queried are aware their responses might have a bearing onmonetary policy by the central bank. So respondents could be tempted to shape theiranswers in a way that can result in a favorable interest rate policy. Secondly, a large partof the survey depends on forecasts, which read more..

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    JAPAN INDUSTRIAL PRODUCTIONRank:5th.What Is It:Measures the change in monthly industrial output.News Release on Web Time:8:50 A.M. (local time); a preliminary report is released in the finalweek of the next month. A revised report is published another two to threeweeks later. (For example, data on October is announced during the last weekin November, to be followed by another report on revisions in read more..

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    even sell some financial assets. They can also choose to manipulate the value of theyen to help export sales. Indeed, no other country intervenes in the currency markets asmuch as Japan. Given the ability of Japan’s economy to affect asset values in world capital marketsand sway currency markets, foreign investors know they have to stay informed on thesoundness of the economy. That means paying particularly close attention to its industrialproduction, which many experts consider to be one of read more..

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    • Mining and Manufacturing: Industrial Production(1) This is the summary page of the industrial production report. It provides the lat-est monthly and annual change in output (up 0.8% for the month of October andup 3.6% over the year). A black triangle near a number indicates a decline. Otherpages in the report (not included here) provide additional details on the strengthand weakness of individual sectors. • Mining and Manufacturing: Shipments(2) Industrial shipments represent actual sales read more..

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    315Japan’s Industrial Production▲▲▲32109Baumohl_Ch04.qxd 8/3/04 2:59 PM Page 315 read more..

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    316Chapter 4 • International Economic Indicators: Why Are They So Important?▲4▲409Baumohl_Ch04.qxd 8/3/04 2:59 PM Page 316 read more..

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    FRANCE MONTHLY BUSINESS SURVEY (INSEE)Rank:6th. What Is It:A survey assessing the confidence of French industry leaders.News Release on Web Time:8:45 A.M. (Continental time); it is published at the end of themonth being surveyed. Frequency:Monthly.Source:INSEE (National Institute for Statistics and Economic Studies).Revisions:Changes are made in the previous month’s data to read more..

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    • B: Demand(B-1) Considering the season, how would you describe your current demand, or orderbookings? (Strong? Normal? Weak?)(B-2) Considering the season, how would you describe your export orders (i.e.,demand for French goods from other countries)? (Strong? Normal? Weak?)• C: Inventory of Finished Goods(C-1) Considering the season, how would you describe your present state of finished-goods inventory levels? (Above normal? Normal? Below normal?) • D: Change in Producer Prices(D-1) read more..

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    (2) Finished-goods inventory levels: This is the outcome to question C-1 and relates tothe amount of inventory accumulation. The December level has dropped to 9,which is a good sign for the economy given where it stood months before. It sug-gests demand is picking up and fewer companies are complaining about being leftwith large unwanted inventory. (3) Demand and order levels, total and exports: These are the answers to questions B-1 and B-2. Here we can see to what extent demand for goods read more..

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    EUROZONE—MANUFACTURING PURCHASINGMANAGERS INDEX (PMI) GLOBAL—MANUFACTURING PURCHASINGMANAGERS INDEXRank:7th.What Is It:One measures changes in manufacturing activity in the Eurozoneregion; the other looks at shifts in manufacturing globally. Home Web Time:Eurozone Manufacturing PMI:9 A.M. (London time); released the first business day of the month. Global Manufacturing PMI:11 A.M. (New York time); released the first business read more..

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    the Global PMI are now closely monitored by money managers because these reports canhave a direct bearing on fiscal and monetary policy. They are considered very good predic-tors of foreign economic trends.The surprisingly quick public acceptance of these new regional PMI measures comesat a time when there is growing frustration with government economic indicators. Suchstatistics are often released after a long lag time. Some, like the GDP, are published 60 to70 days after the quarter ends. read more..

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    3. Is the stock of items purchased by your company higher, the same, or lower thanone month ago? For manufacturers to keep their production lines running smoothly, they need tohave an ample supply of raw material on hand. But as output accelerates, suppliestypically diminish and purchasing managers need to reorder more stock. Thus, thepurchase of new items is linked to the pace of production. 4. Are supplier delivery times experienced by your company longer, the same, orshorter than one month read more..

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    response is given a 30% weight, output 25%, employment 20%, supplier delivery times15%, and stocks of items purchased 10%. You’ll notice that the PMI index on prices is leftout of the equation. Though input prices are a very good leading indicator of producer priceinflation, changes in prices can occur for many reasons that have nothing to do with thebusiness cycle. Strikes, currency movements, restrictions in supplies by foreign producers,and bizarre weather all influence input prices of raw read more..

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    The Global PMI contains the same basic subindexes as the Eurozone PMI: 1. Global manufacturing output index 2. Global manufacturing new orders index 3. Global manufacturing employment index 4. Global supplier delivery times 5. Global stock of items purchased Again, a reading of 50 indicates no change from the previous month. Below 50 is a signof contraction, and above 50 points to an expansion. 324Chapter 4 • International Economic Indicators: Why Are They So Important?In addition to a read more..

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    not a very effective predictor of future activity. Moreover, calculating output in the servicesector can be quite problematic. So much depends on what the service is. For example, output at a bank might be based on how much in fees it can generate from loans and otheractivities. With an accounting firm, it may be linked to billable hours. Service activity in adoctor’s office can be based on the number of patients they see in a specific period. Since theservice sector involves so many different read more..

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    OECD COMPOSITE LEADING INDICATORS (CLI) Rank:8th. What Is It:A tool to forecast business activity in the world’s largest economies. News Release on Web Address:www.oecd.orgRelease Time:Noon (Continental time); data is released on the Friday of the firstfull week of the month and refers to activity two months earlier. (Forexample, January’s release reports leading indicators for November.)Frequency:Monthly.Source:Organization for Economic Cooperation and read more..

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    Table 4.8OECD Composite Leading Indicators The OECD has composite leading indicators for 23 member countries and the follow-ing 7 regions:1. Big Four European Countries:France, Germany, Italy, and the United Kingdom2. Eurozone:Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, theNetherlands, Portugal, and Spain.3. G7 (Major 7 Economies):Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.4. EU-15*:All Eurozone countries plus Denmark, read more..

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    interest rate policy for the euro currency zone. Over the years, the CLI has proven tobe an effective early-warning system, able to identify peaks and troughs in economicactivity some nine months in advance. The OECD has been publishing the CLI since 1981, and the methodology is fairlystraightforward. Financial indicators with a reputation for being ahead of the economiccurve are chosen as components for this indicator. Among the most common national com-ponents used by the OECD to calculate the read more..

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    CHINA INDUSTRIAL PRODUCTIONRank:9th. What Is It:Measures the monthly change in China’s industrial output. News Release on Web Time:Between 3:30 and 4:30 P.M. (local time); usually released fourweeks after the end of the month being covered.Frequency:Monthly.Source:National Bureau of Statistics of China (NBS). Revisions:Corrections to data may occur more frequently in the future as read more..

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    The broader question is what intentions do China’s top political leaders have for thecountry? Government officials talk about moving toward a “socialist market economy,” astrange brew where socialist ideals can be met in conjunction with a more liberal, open,and capitalistic economy. Precisely what this means or how both can be achieved is any-one’s guess. In any event, China’s economic strategy can be more easily understood fromthe actions taken so far by its policymakers, and here read more..

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    331China Industrial Productionwas overestimating its GDP growth to lure foreign capital. At other times, there wereaccusations that Chinese statisticians were intentionally underestimating growth to createthe impression that the economy was not overheating. Amazingly, even top Chinese lead-ers acknowledged there was a problem with the integrity of the data. As recently as 2000,former premier Zhu Ronji said that Chinese economic reports suffered from “falsificationand that exaggeration was read more..

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    A couple of pointers are needed to appreciate the industrial production numbers inthe release. Unlike the U.S. series, the Chinese do not produce an index of industrial pro-duction, but instead estimate a value-added amount to what is produced each month. Theprocess works as follows: Output data is compiled every month from all state-owned andstated-controlled enterprises. Also included are all other (private) enterprises producing atleast 5 million yuan a year (roughly $600,000 at 2003 exchange read more..

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    333China Industrial Production09Baumohl_Ch04.qxd 8/3/04 3:00 PM Page 333 read more..

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    BRAZIL INDUSTRIAL PRODUCTIONRank:10th.What Is It:Tracks changes in Brazil’s industrial output.News Release on Time:9:30 A.M. (local time); the report is released about 40 days afterthe survey month ends. (Thus, January’s release refers to industrialperformance in November.) Frequency:Monthly.Source:Brazilian Institute for Geography and Statistics.Revisions:Monthly figures are subject to revisions. The read more..

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    democracy in the mid 1980s, smack in the middle of the Latin American debt crisis. Inaddition to political reforms, Brazil’s leaders have since liberalized the domestic capitalmarkets. They allowed their currency to float in foreign exchange markets, crafted a newfiscal spending plan, opened the economy to more competition, embarked on a privatiza-tion program, and passed legislation to further deregulate the economy. The results for Brazil’s economy have been palpable. After growing an read more..

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    Another government agency, the Central Bank of Brazil, does a better job of present-ing the industrial production tables along with other important economic indicators—though without any accompanying commentary. What’s more, the information has to bedownloaded onto a spreadsheet (, but it’s astep well worth the effort. After the data is downloaded, the top part of the page notes the monthly value-addedindex of industrial production, while the read more..

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    The page also breaks down industrial production as follows: • General industrial production index: Overall snapshot of industrial output• Capital goods: An indicator that tells if companies are investing• Intermediate goods: A helpful leading sign of future production • Consumer durable goods: Consists of household appliances and home electronics• Consumer non-durable goods: Food and clothing. Both consumer durable and non-durable goods output are linked to the growth in wages and read more..

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    C HAPTER5Best Web Sites for U.S. Economic IndicatorsUp until the 1990s, large economic research firms would charge clients thousands of dol-lars for churning out statistics on the U.S. and international economies. Today, thanks tothe Internet and the intense competition among financial services companies to attractcustomers, anyone can easily obtain economic or financial data directly from the Web atno cost. The following is a list of online resources that provide such information for free. read more..

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    340Chapter 5 • Best Web Sites for U.S. Economic Indicators• Historical data on the GDP and its components:• Industrial Production and Capacity• Factory Orders (formally known as Manufacturers’ Shipments,Inventories, and Orders)• Advanced Report on Durable Goods• Chicago’s Purchasing Managers Report read more..

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    • Retail • E-Commerce Retail• Weekly Chain-Store• Consumer debt (formally known as Consumer Credit Outstanding)• How individuals are handling their debt (Cambridge Consumer Credit Index)• Investor Confidence (UBS Index of Investor read more..

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    • Weekly-Claims for Unemployment• Help Wanted Advertising SALES ANDCONSTRUCTION ACTIVITY• Housing• Housing Market Index—Builders’ perception of the current and future market for new single-family homes (National Association ofHome Builders) (type “HMI” in the search box) • Single-Family Existing Home Sales (National read more..

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    INFLATION PRESSURES• Consumer Price Index (CPI)• Producer Price Index (PPI) • Productivity and• Employer Costs for Employee• Employment Cost• Historic rates of U.S. inflation (the CPI) going back to 1913:• Estimates of U.S. inflation going back to read more..

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    THE FEDERAL BUDGET• Current projections as well as historical data on the U.S.• Latest proposed budget of the United RATES• Latest interest rates on mortgages, mortgage refinancings, homeequity loans, auto loans, and credit• Historical interest rates on Federal funds and Treasury• Current interest rates on Federal read more..

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    • Historical foreign exchange• Dollar’s performance versus its major trading SHOPPING FORECONOMIC STATISTICS• Locate common economic• Raw data of U.S. economic statistics for graphing• Economic Report of the President (which contains a comprehensivecollection of economic read more..

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    C HAPTER6 Best Web Sites for InternationalEconomic Indicators (Only those available in English are listed here)CALENDAR OFRELEASES FORFOREIGN ECONOMIC OFGLOBAL ECONOMIC NEWS STATISTICS read more..

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    • Bosnia and••• Czech••••• read more..

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    349Best Web Sites for International Economic Indicators••• United• Asia•••••• read more..

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    ••• Korea (South):• Kuwait: • Kyrgyzstan:• Laos:••••• read more..

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    ••••• Cayman• El••••• Netherlands• St. Kitts and read more..

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    ••• Africa •••••••••••• read more..

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    BEST MEGASITES FORINTERNATIONAL ECONOMIC www.ntc-research.com Web Sites for International Economic Indicators11Baumohl_Ch06.qxd 8/3/04 10:31 AM Page 353 read more..

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    355IndexAABC News/Money Magazine Consumer ComfortIndex, 94computing, 95accuracy of statistics, 10advance report on durable goods orders, 116annual rates, 17Bbanks Central Bank of Brazil, 336Federal Reserve Banks, 198BEA (Bureau of Economic Analysis), 240Beige Book, 220benchmarks, 21benefits, 283bondsaffected by jobs report, 37economic indicators, 12impact ofBeige Book, 222BOS, 208business inventories, 136CCCI, 85Chicago Purchasing Managers Index, 160Consumer Confidence Index, 90consumer read more..

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    356Indexmarket impact, 136overview, 130percent changes, 134Business Outlook Survey. See BOSCCambridge Consumer Credit Index. See CCCIcapacity utilization, computing, 138capital goods orders (durable goods), 120CBOT (Chicago Board of Trade), 4CCCI (Cambridge Consumer Credit Index), 80computing, 81forecasting the economy, 81market impact, 85reality gap, 84Central Bank of Brazil, 336CFNAI (Chicago Fed National Activity Index),216-217chained dollars, 56Chicago Board of Trade (CBOT), 4Chicago read more..

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    357IndexcostsChinese industrial production, 330ECEC, 282-284labor, 262productivity and costs, 275-276computing, 278forecasting the economy, 279market impact, 281report components, 277CPI (Consumer Price Index), 245CPI-W, 287market impact, 254Web site, 343credit cards, consumer installment debt, 75-76currencyDeutsche Mark, 303U.S. dollar, 344. See also dollar valueyen, 309current account balance (international trade), 238current dollars vs. constant dollars, 20Ddata, 21debt (consumer installment read more..

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    358Indexeconomic indicators, 6, 10ABC News/Money Magazine ConsumerComfort Index, 94-95Beige Book, 221bonds, 12BOS, 205computing, 205forecasting the economy, 207market impact, 208Brazil, industrial production, 334-337business inventories, 130computing, 132information gained from, 133market impact, 136overview, 130percent changes, 134CCCI, 80-81computing, 81market impact, 85CFNAI, 216computing, 217market impact, 217Chicago Purchasing Managers Index, 157computing, 157market impact, 160China, read more..

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    359Indexcomputing, 269forecasting the economy, 269-272market impact, 273Industrial Production and Capacity Utilization, 137computing, 138information gained from, 140-144market impact, 146international, 13-15data format, 297impact of, 295-296International Trade in Goods and Servicesreport, 223-225computing, 226forecasting the economy, 226, 230, 235market impact, 235International Transactions report, 237capital and financial accounts, 239computing, 240current account balance, 238forecasting the read more..

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    360Indexeconomic reports, evaluating, xixeconomybusiness cycles, 18moving average, 20Empire State Manufacturing Survey. See ESMSEmployment Cost Index (ECI), 262, 283, 343employment reportseffects on interest rates, 6evaluating, 5employment, Web site resources, 341ESMS (Empire State Manufacturing Survey), 199computing, 200forecasting the economy, 201market impact, 203establishment survey, 26-27Europe, Web site resources, 348Eurozone Manufacturing PMI, 320-322evaluatingeconomic reports, read more..

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    361IndexHhelp wanted advertising index, 42affects on stocks, bonds, dollar value, 44what it foretells, 43HICP (Harmonized Index of Consumer Prices), 305HMI (Housing Market Index), 187household survey, 26housing permits, 170housing salesHMI, 187Web site resources, 342II/S (inventory/sales) ratio, 131ICSC (International Council of Shopping Centers),70import/export prices, 268computing, 269forecasting the economy, 269-272market impact, 273importing motor vehicles, 230incomedistortion, 55DPI, read more..

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    362Indexrisks of dependence on global trading, 224Web site resources, 342Internet, retail sales, 68inventories, 106durable goods, 122maintaining, 116inverted yield curves, 292ISM (Institute for Supply Management), 147, 340ISM Non-Manufacturing survey, 154compared to Manufacturing survey, 155computing, 155information gained from, 156JJapanindustrial production, 312Tankan Survey, 306-309Web site resources, 349jobs report, 3, 25evaluating, 5impact on bonds, 37interest rates, 6stocks, 37Johnson read more..

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    363Indexmass layoff statistics, 48-51Merchandise Trade Account, 238METI (Ministry of Economy, Trade and Industry), 312Michigan Sentiment survey, 91computing, 92market impact, 93MLS report, 48Monthly Business Survey (France), 317mortgages, Weekly Mortgage Applications Survey, 191moving averages, 20NNAHB (National Association of Home Builders), 187NDS (National Delinquency Survey), 193Neilsen/Netratings, 68net exports, 106new durable orders excluding both defense andaircraft, 119new home sales, read more..

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    364IndexRrates (annual), 17real dollars vs. nominal dollars, 20real earnings, 286-287real estateexisting home salescomputing, 176market impact, 180new home sales, 181forecasting the economy, 182market impact, 185real GDP, 107percent changes, 111reality gap, 84Refinance Index (Weekly Mortgage ApplicationsSurvey), 192regional Federal Reserve BanksBOS, 205CFNAI, 216ESMS, 199Kansas City Fed Manufacturing Survey, 209reports, 198retail sales, 62breakdown of, 64computing, 63e-commerce, 67computing, read more..

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    365Indexbusiness inventories, 136Consumer Confidence Index, 90consumer installment debt, 79consumer sentiment surveys, 93CPI, 254ECI, 267e-commerce retail sales, 69ESMS, 204existing home sales, 180Factory Orders, 129GDP, 115housing starts and building permits, 173import/export prices, 274industrial production and capacity utilization, 146International Trade in Goods and Servicesreport, 236ISM manufacturing survey, 153jobs report, 37LEI, 168new home sales, 186personal income and spending, 61PPI, read more..

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    366IndexWwages, 283real earnings, 286Web sitesABC News/Money Magazine ConsumerComfort Index, 95international economic indicators, 347-353U.S. economic indicator resources, 339-345weekly chain store sales, 70ICSC - UBS, 72Johnson Redbook Average, 71market impact, 74weekly claims for unemployment insurance, 38-40Weekly Mortgage Applications Survey, 191components, 192forecasting the economy, 193market impact, 194Yyen, 309yield curve, 289computing, 292flat, 291forecasting the economy, 293inverted, read more..

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    www.informit.comYOUR GUIDE TO IT REFERENCEArticlesKeep your edge with thousands of free articles, in-depth features, interviews, and IT reference recommen-dations – all written by experts you know and trust.Online BooksAnswers in an instant from InformIT Online Book’s 600+fully searchable on line books. For a limited time, you canget your first 14 days free.CatalogReview online sample chapters, author biographiesand customer rankings and choose exactly the right bookfrom a selection of over read more..

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    373Last HC HeadAt Wharton, Write Them.We Don’t Teachthe Rules of Business…Executive Education That Works™With more than 200 world-class faculty, Wharton has the most powerful research enginein the world. Every year, Wharton Executive Education draws on this strength to deliverprograms in Senior Management, Finance, Leadership, Management and Marketing—creating knowledge to propel organizations and power careers.For more information and a read more..

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    374Chapter 1 • Chapter TitleABOUT CONCENTRATED KNOWLEDGE CORPORATIONthe producers of the CD enclosed in the back of this bookCKC invites you to learn more about receiving summaries ofthe best business books of the year delivered right to your dooror computer.There are so many great business books, but so little time.You know you need tokeep current with theexpanding base of knowledge. But how canyou possibly keep up withall that reading?The solution is SoundviewExecutive Book Summaries®.Our read more..

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    375Last HC HeadFor licensing and content information, please contact:Jamie HammondAssociate Director of Marketing215.898.2388 • hammondj@wharton.upenn.eduKnowledge@Whartonis a unique, free resource that offers the best of business—the latest trends; the latest research on a vast range of business issues; original insightsof Wharton faculty; studies, papers and analyses of hundreds of topics and industries.Knowledge@Wharton has over 300,000 users from more than 189 read more..

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    376Chapter 1 • Chapter TitleFinding Fertile GroundIf you’re starting a business, the statistics prove that your best odds of success are in high technology industries: not just computing and telecom, but also biotech, electronics, manufacturing and materials, medical devices, robotics, and other knowledge-intensive fi elds. This is the fi rst book to provide a methodology for fi nding those extraordinary opportunities. Shane shows how to identify market opportunities and competitor read more..

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