How Forex Traders Use Them
If you are a forex trader, then you need to know what are economic indicators and how they can affect the market.
What many people don’t realise is that there are both leading and lagging indicators.
What this means is that some economic data comes before others, giving traders an edge when it comes to predicting future trends in the markets.
In this article we will take a look at what these indicators are and how they work.
What are economic indicators?
An economic indicator is a statistical measure that monitors the activity of the economy.
Economic indicators can be classified into two groups:
- Leading
- Lagging
What this means is that some data comes before others, giving traders an edge when it comes to predicting future trends in the markets.
Leading indicators are those which predict events in advance such as inflation or unemployment rates.
While lagging ones are those where you have to wait for their release date such as retail sales numbers and GDP figures.
There’s not one single best indicator (despite what many people would like you to believe) but we’ll go through some of them below.
Why are economic indicators important for the economy?
Economic indicators are important for the economy because they provide a glimpse into what’s happening with our financial system.
In fact:
Let’s take the US as an example of the importance of these economic indicators.
The Federal Reserve is trying to make sure that the economy does well.
It does this by looking at indicators. Some of these are important for the Fed, like employment and prices.
One of the best gauges for determining a country’s economic state is gross domestic product or GDP.
This figure measures the output, which represents total market value of goods and services produced in an economy during a period.
With this gauge included all sectors within an economy can be seen to see how well they are performing individually as well as collectively.
It is common for economists to use the quarterly real GDP series (nominal GDP adjusted to remove the effects of inflation) in order determine when a business cycle has either expanded or contracted.
The National Bureau of Economic Research uses more timely monthly indicators and data sets, which means that they are able to identify official beginnings and ends dates on an unprecedentedly close basis.
There are a substantial amount of economic indicators that can be pulled out from the data releases each day to help build an overall picture of a country’s economic health.
The key reason for the indicators is when it comes to forecasting the robustness of our national economy, FOMC policymakers and staff economists rely on many different indicators.
These include labor market conditions as well as industrial production rates or any number of monetary policy tools that can be utilized by the Fed for an appropriate rate hike or cut in order to keep inflation under control.
Other factors like interest rates are also heavily monitored but don’t always play a huge role when assessing how healthy this country is economically speaking; while fiscal policies and regional economic activity show potential weak spots.
In addition there’s international data points such oil prices which affect.
Combining all of this together helps gauge whether an economy is expanding or contracting, thus indicating the health over the overall economy.
What are the 10 economic indicators?
1. GDP (Gross Domestic Product)
GDP stands for Gross Domestic Product. We measure how much money we spend on goods and services in the country.
This means that we add up everything that is bought, then make adjustments for imports and exports.
The GDP is a number to show how much money people spend in an economy on goods and services.
This number is calculated by adding up different numbers from places like grocery stores, car repair shops, and government programs.
This means that the GDP tells you how much money is being invested, spent, and made in an economy every day.
2. Unemployment Rate
The unemployment rate is a statistical measurement of the percentage of people in the workforce who are not currently employed.
What this means is that it tells you how many people are unemployed and actively seeking employment but can’t find any jobs.
The higher the unemployment rate = the less amount is being spent = weaker overall outlook on the health of the economy.
3. CPI (Consumer Price Index)
The CPI is a measurement of the price level for goods and services in a particular area or country.
It can be calculated by comparing how much prices have increased from one time period to another.
The CPI helps you understand inflation and deflation, which means that it tells you how much prices have gone up from where they were before.
It measures goods, like unused vacation days and shares of company stock, as well as things people pay for, like wasted food at home or clothes that don’t fit anymore.
What this means is that the index measures both how much it costs to live and what we are spending our money on.
4. Retail Sales Figures
The retail sales figures are how much goods and services people buy.
They show how people spend money and also can tell you the economic growth rates.
Stores across the country provide information on their monthly sales to organizations like the Bureau of Labor Statistics.
This means we can get an idea about what people are buying at stores and how much they spend.
These numbers tell you how much money is being spent in different areas or by consumers, and this can be used to predict future growth rates for the economy.
5. Industrial Production Numbers
Industrial production is a way of measuring how much things are being produced in an industry. This can show how the economy is doing.
6. Money Supply
The money supply is a measure of how much liquid assets are in the economy.
This means that it tells you how much people will spend on goods and services.
7. Inflation Rate
Inflation is the rate at which prices are going up every year.
When you see an inflation rate of 3%, that means that prices are going up by 3% every year – and this is before accounting for quality improvement, substitutes and heavy competition.
8. Interest Rates
Interest rates are the amount of money that you borrow or save. It is how much money you will have to pay back.
If interest rates are high, people will save more instead of borrowing and spending a lot now.
Interest rates are also an indicator of borrowing and saving trends, investment rates, and economic growth rates.
9. Consumer Confidence Index
A consumer confidence index is a survey that can show how people feel about their economic situation.
These surveys can give you information about what the future economy will be like.
10. Building Permits
A building permit is a sign of where we are in the economy.
It tells us how many buildings are being built, how much people are investing in new buildings and what the economy will look like in the future.
How to find out economic indicator data?
The data is available on the Internet through economic websites and sources, such as Bloomberg. What you have to do is enter your search terms into a website that provides this information like Google Finance or Yahoo! Data.
Here is a quick list of websites that provide economic data:
Trading Economics
Investing.com
TeleTrader
TradingView
Feel free to use the above websites to find economic data to improve your overall fundamental analysis of the markets.
Overall…
Now that you understand what are important economic indicators, and how to find their data, it’s time to start thinking about what this information means for your personal trading.
The forex market is one place where these pieces of information could have a big impact on larger trends in the global economy.