Forex Investment and Currency Trading

Economic indicators provide a snapshot of key parts of a country’s economy. You can read stories almost every day about how well a country is doing based on some economic indicator. Popular indicators track employment, money supply, interest rates, housing starts, housing sales, production levels, purchasing statistics, consumer confidence, and many factors that impact the health of a country’s economy.

While all these indicators are important, we’re going to focus on just a few of the most critical ones. You could go crazy trying to keep your eye on all the indicators and what they mean. We’ve picked four key types of economic reports for you to watch—Gross Domestic Product (GDP), employment statistics, the Fed’s Beige Book, and trade balance statistics.

Gross Domestic Product

The GDP is the total value of all final goods and services produced within a country’s borders each year. This indicator measures the national income and output for a country.

Each quarter the government releases the percentage of growth in the GDP. Most industrial nations, such as the United States, Japan, and European countries, experience a GDP growth of between 3 and 5 percent. If growth falls below this level, it’s usually a sign of trouble and an indication that the country’s economy may be stalling or worse—heading into a recession. If growth climbs above that window, it could also be a sign of trouble—inflation. In extreme situations, the run-up could lead to a crash.

Developing countries can grow at a faster pace, but that too can lead to trouble. For example, China has been growing at a pace of 8 to 9 percent per year since 2003. However, too much growth and too much money can drive a country toward a severe economic downturn. When a country doesn’t act quickly to stem its overheated growth, it can result in a crisis. Thailand experienced this with a major loss of its currency’s value in the 1990s. Its crash led to currency speculation, failing banks, and falling stock prices. The Philippines, Indonesia, and Korea have faced similar problems.

If you want to find out if there are signs of trouble in a developing country, one good source of information is the World Bank, which regularly reports on economic indicators in the developing world. You can read its reports atwww.worldbank.org.

Employment

Employment reports can be an important indicator of a country’s economic health. When the economy is strong, jobs are created, but as the economy contracts, jobs are lost. If the economy is going too strongly and too many jobs are created, then wages begin to rise as companies compete for the best workers. Rising wages can lead to inflation, which will likely result in a country’s central bank raising interest rates to cool the economy. People will then buy fewer goods as interest rates rise, which means less production is needed. When less production is needed, jobs get cut, leading to a weaker economy.

The country’s central bank will stimulate the economy by lowering interest rates and starting the entire cycle yet again. Watching employment reports can help you determine where in this cycle a country’s economy stands.

When the employment report is released, you should watch for three key factors—payroll, unemployment rate, and average hourly earnings growth.

• Payroll. This measures the change in the number of workers in a given month. In the United States, this report’s estimates are based on a survey of larger businesses and government entities. It’s important to compare this number to a monthly moving average for six or nine months to get a good idea of the trend for payrolls and employment. Expanding payrolls means the country’s economy is growing. Contracting payrolls means the economy is heading for a slowdown.
• Unemployment Rate. This percentage measures the percentage of the civilian labor force actively looking for a job but not able to find one. This number can be skewed, especially during a weak economy—as workers get discouraged looking for work, they tend to drop off the unemployment lists. During particularly long periods of unemployment, the number of unemployed can be higher than shown in this rate.
• Average Hourly Earnings Growth. This number shows the growth rate of average hourly wages each month. This can be a good way to keep your eye on the potential for inflation. As wages increase, the possibility of inflation also increases.

Conversely, a high unemployment number can be good news and stimulate the economy. That’s because high unemployment usually results in a lowering of interest rates, which can increase spending. When unemployment numbers improve and jobs are created, stock markets will likely fall because they are expecting the Fed to raise interest rates to slow things down again.

Beige Book

One of the easiest ways to get a good overview of what is happening throughout the U.S. economy is to read the Fed’s Beige Book, which is officially known as the Summary of Commentary on Current Economic Conditions. This book is published eight times per year by the Federal Reserve Bank and includes anecdotal information on economic and business conditions in each ot the Fed’s districts.

Information for the book is collected by bank staff through interviews with key business leaders, economists, market experts, and other sources from within each of the bank’s 12 districts. This book is like the Bible to the Federal Reserve Board of Governors. If the Beige Book shows warning signs of inflation, recession, or high unemployment, you are more likely to see the Fed act and change interest rates.
 
Trade Balance

The most critical data you need to find out about the current and potential future status of a country’s currency is its trade balance. Nations that regularly run a trade deficit can expect to see the value of their currency fall. The reason for this is that as a nation’s currency flows overseas, it gets converted.

The two key indicators of trade balance to watch are balance of payments and balance of trade:

• Balance of payments measures the financial capital that flows from one nation to another. If more money flows in than out, a country has a positive balance of payments. Conversely, if more money flows out than in, a country has a negative balance of payments.
• Balance of trade calculates the sum of money in a specific country’s economy by the selling exports minus the cost of buying imports. Transactions involving foreign investment in a country are also figured into this equation. A positive trade balance is called a trade surplus. A negative trade balance is called a trade deficit.

The more a nation’s currency is sold rather than bought, the greater the risk that the demand for that currency will fall. When demand falls, prices drop. If a nation’s currency has not fallen dramatically, and that’s primarily because capital investment in this country is still strong. This includes major real estate and business purchases by foreign companies and purchases of  the government debt by foreign entities (either governments or corporations).