US - Common Economic Statistics

Discount Rate

The interest rate charged to qualifying depository institutions when they borrow short-term funds from the Federal Reserve through its Discount Window program. An increase in interest rates usually results in an increase in demand for U.S. dollars as investors can expect higher returns as interest rates rise.

In order to access funds through the Discount Window, borrowers must provide collateral deemed of sufficient value by the Fed. Despite this requirement, some observers liken the Discount Window to the equivalent of a “lender of last resort” used only by depository institutions unable to acquire short-term funding through other avenues. While this is not the intent of the Discount Window, this stigma is attached to it nonetheless and there is a growing trend amongst financial institutions to avoid using the program.

Because this is an interest rate that the Fed sets, it is important to watch as it provides insight into the Fed’s short-term monetary plans. A reduction in the Discount Rate for instance, is a clear indication that the Fed wants to see lower interest rates, while an increase in the Discount Rate, suggests the opposite objective.

Typically, the Fed maintains the Discount Rate at 50 to 100 basis points above the Federal Funds Target Rate but depending on current economic conditions, this difference can vary.

Federal Funds Target Rate

The interest rate that the Fed wants depository institutions to charge other institutions for borrowing money on an overnight basis. While the Fed does not set the overnight Federal Funds Rate directly, it uses its ability to control the money supply to influence this lending rate. An increase in interest rates usually results in an increase in demand for U.S. dollars as investors can expect higher returns as interest rates rise.

When news reports state that the Fed has lowered or raised interest rates, it is the Federal Funds Target Rate to which they are referring. The Fed then attempts to adjust the actual federal funds overnight rate by managing the money supply through various open-market operations conducted by the FOMC (Federal Open Market Committee).

One way the Fed can control the money supply is through the regulation requiring all financial institutions to maintain deposits at a federal reserve bank. These deposits form the pool of resources that the financial institutions use to lend money amongst themselves on an overnight basis to meet reserve requirements. However, money held in the federal reserve cannot be used for any other banking purposes. This means that while funds are held in federal reserve deposits they are effectively “withdrawn” from the banking system.

This enables the Fed to tighten monetary policy causing upward pressure on interest rates simply by increasing the reserve amounts. In other words, if the Fed wants to see the Federal Funds rate rise, increasing the amounts financial institutions must hold in reserve reduces the supply of money in the U.S. banking system. This leads to an increased demand for capital which invariably results in an increase in the overnight lending rates. Other commercial interest rates such as the prime rate will also rise accordingly.

Conversely, the Fed can loosen monetary policy by reducing the reserve amounts thereby increasing liquidity within the banking system.

Prime Rate

The rate at which lending institutions charge their preferred customers. Because these customers represent the least risk, lenders can offer them the best interest rate. An increase in interest rates usually results in an increase in demand for U.S. dollars as investors can expect higher returns as interest rates rise.

The prime rate fluctuates in response to changes in the trendsetting federal funds rate (the rate at which banks lend each other funds) and is typically pegged three percentage points above the federal funds rate. The prime rate is a commercial rate that banks advertise to the public and other interest rates such as mortgages and automobile loans are based on the prime rate and are often expressed as “prime plus” a certain percentage. Because these rates are advertised to commercial customers, the major banks typically charge very similar rates in order to remain competitive.

TED Spread

Shows the difference between the three-month treasury bill interest rate and the three-month LIBOR rate.

Treasury bills (i.e. T-bills) are a form of short-term debt backed by the U.S. government sold in $1,000 increments. In the case of a three-month t-bill, the U.S. government is obligated to repay the full amount of the original price (the principle) together with the interest earned based on the interest rate (the yield). The LIBOR rate – or the London Inter-Bank Offered Rate – is the interest rate offered on unsecured loans transacted through the London inter-bank market and is an important interest rate benchmark used to set commercial lending rates.

Originally, the TED Spread measured the difference between 3-Month T-Bill futures contracts and the three-month eurodollar futures and this gave rise to the name of the indicator with the letter “T” representing T-Bills and “ED” eurodollars. When the Chicago Mercantile Exchange ceased offering Eurodollar futures, the indicator was changed to measure the spread between T-Bills and the LIBOR rate.

The value in the TED Spread as an economic indicator lies in the statement it makes in regards to credit risk levels in the economy. T-Bills – which are considered as close as possible to being risk-free as they are backed by the U.S. government – are contrasted with the credit risk associated with commercial banks as indicated by the LIBOR rate. When the spread increases, this is an indication that lenders feel the risk of default on loans made through the inter-bank market is increasing and this is based on the premise that when lenders feel there is greater risk, they demand higher returns.

House Price Index (HPI)

The U.S. House Price Index (HPI) is a quarterly report showing the price change for single-family properties either resold or refinanced during the reporting period. By compiling this information into a single report, the HPI provides an assessment of current house prices and possible price and property value trends.

The U.S. Office of Federal Housing Enterprise Oversight (OFHEO) produces and publishes the Housing Price Index (HPI) for all private homes sold or refinanced and mortgaged through Fannie Mae or Freddie Mac. With records dating back to 1975, the HPI provides an overview of house price changes throughout each region in the United States.

Personal Consumption Expenditures (PCE)

Compiled by the Bureau of Economic Activity, the Personal Consumption Expenditure (PCE) is an index outlining changes in the expenditures of households including services and both durable and non-durable goods. This statistic is one part of the overall data collected to calculate the country’s total Gross Domestic Product (GDP).

An increase in PCE – much like an increase in GDP – indicates a growing economy. As the economy of a nation grows, an increased demand for the country’s currency typically results as investors buy more currency of high-performing countries at the expense of weaker economies.

At first glance, the Personal Consumption Expenditure index may seem to provide the same information as the Consumer Price Index (CPI) – in truth, both are calculated by the Bureau of Economic Activity and both provide insight into consumer spending – but there is an important distinction between the two. The PCE measures changes in overall household spending, whereas the CPI – which is specifically used to measure the effects of inflation – produces an index based on a defined basket of goods. It is the difference in the cost of this basket of goods that when compared from period to period, illustrates the effect of inflation on household purchasing power.

Average Hourly Wages

Monthly report that details conditions for nonfarm workers that are paid an hourly wage. Data includes number of employed, hours worked, and total earnings.

The Average Hourly Wages is an important metric as it provides further clarity on U.S. employment levels and overall labor costs. Each month the Bureau of Labor Statistics surveys 150,000 business and government agencies and produces an hourly wage report one week after the end of the month.

Like other labor reports, a decline in the number of people employed or a reduction in overall earnings is seen as a negative economic indicator and this typically results in a lower demand for goods and services. This lower demand may trigger further job losses as employers deal with reduced demand for their products thereby further exacerbating employment opportunities.

Add to this the fact that workers currently employed but feeling vulnerable with respect to their continued employment, tend to reduce their spending in a bid to boost savings to prepare for a possible job loss. This behavior further reduces consumer spending and can actually fuel additional layoffs.

Bond Yield

Average yields on the secondary market for treasury bonds. The 30-year bond – also referred to as the long bond or simply as a T-bond – has the longest maturity of any treasury bond offered by the U.S. government.

The bond secondary market facilitates the buying and selling of bonds prior to their maturity date. Speculators participating in this market face risks that can affect the future value of a bond with interest rate changes being the most prevalent factor. When interest rates rise, new bond issues will pay a higher yield in order to compete with other investment options. This means that bonds issued prior to the interest rate increase and paying a lower yield than the new issues, are now worth less relative to the new bonds. This fact will be reflected in the price of the bonds being traded. Because bond value and interest rates have an inverse relationship, bond speculators pay very close attention to changes in the interest rate.

Yield Curve

Yield curves plot the return on various fixed income instruments. The shape of the curve illustrates the relationship between expected yields and time to maturity. In the U.S., the Treasury yield curve is the benchmark interest rate baseline and other domestic bonds rise and fall in relation to these government-issued securities.

Bond yields are based to a large degree on the duration of the bond (i.e. the time to maturity) and the creditworthiness of the issuer. In order to attract investors, non-government bond issuers must offer a higher return as these securities carry greater risks than bonds backed by the government and investors expect some form of premium in return for accepting this additional risk.

Long-term bonds are also at risk of losing value through a diminishing of the liquidity spread. This term refers to the difference between the yield and short-term interest rates. As interest rates rise, the locked-in yield of a bond becomes less valuable as it does not adjust higher to compensate for the rising interest rates, thereby reducing the true value of the return. If short-term interest rates rise above the yield, the investor actually has a negative liquidity spread.

Normal Yield Curve

A so-called “normal” yield curve is one that curves upwards in a concave manner. This indicates an increase in the yield (the x axis) as time to maturity (the y axis) increases. This follows the tenant of the Arbitrage Pricing Theory that states that the longer the term to maturity, the higher the yield. This approach rewards investors that are willing to lock their money into long-term-bonds despite the increased risks noted earlier.

Flat Curve

A flat yield curve results when the yields are basically the same for all maturities. This indicates that investors are willing to accept yields on long-term instruments that do not include a premium above current short term yields. Investors would only accept this if they feel that the economy has little capacity for growth combined with the likelihood that short-term interest rates will not rise.

Inverted Yield Curve

An inverted yield curve that slopes downwards over time indicates a negative outlook for the market in the long term and could suggest the onset of a prolonged economic downturn or even recession. An inverted yield curve shows even greater long-term pessimism than a flat curve – so much so that long-term bond yields actually fall below short-term yields (negative liquidity spread). The implication is that investors are willing to lock-in investments at the current rate in the belief that yields will continue to fall in the face of a worsening economy.

Humped Curve

A “humped” curve occurs when both short and long tem yields are equal but medium term yields are higher. This indicates an expectation that the economy could be entering a period of growth but this growth is not expected to be sustained for the long term.

Gross Domestic Product

Gross Domestic Product (GDP) is the total value of all goods and services produced within the borders of a country for a given period of time. Everything produced in the country is counted without regard to the nationality of ownership of the firms producing the goods – in short, if it is produced within the country’s borders, it is counted as part of the GDP. This chart shows the percent change in GDP from the preceding quarter.

An increase in GDP is seen as a positive indicator suggesting that the economy is growing. This often results in increased demand for the dollar and could see an increase in value in the FX markets. As the value of a country’s production increases, then a corresponding increase in the workforce likely results which suggests greater employment and higher incomes.

There are shortcomings in this assumption however, as volunteer work is not included in the basic GDP calculation; nor is work performed in the so-called underground economy. In this case, work done “under the table” or in exchange for other goods or services is not part of the GDP results.

Real GDP Versus Nominal GDP

When the value of goods and services from one time period is compared to another, changes in the inflation rate can account for some of the difference between multiple GDP results. In order to make it clear whether or not inflation has been factored in, economists use the term Real GDP to indicate GDP results that have been adjusted for inflation. This is the value that best enables economists to determine if the economy has increased or contracted during the time period.

GDP figures that have not been adjusted are usually referred to as Nominal or Current Dollar GDP amounts.

Non-Farm Payroll

The Non-Farm Payroll (NFP) report is one of several assessments of employment trends provided by the U.S. Bureau of Labor Statistics. Strong employment numbers are a sign of a robust economy and this usually translates to continued demand for the dollar.

The Non-Farm Payroll includes actively employed workers in the U.S. with the exception of the following:

• individuals employed on farms or private homes
• individuals employed in non-profit organizations
• government employees

As an economic indicator, all labor reports are watched very closely by investors. By eliminating farming, non-profits, and government employment statistics, the Non-Farm Payroll report concentrates on the manufacturing and construction sectors producing mostly durable goods. This represents 75 – 80% of the U.S. workforce, making the NFP a key measure of employment.

In addition to providing a count of the number of workers currently employed, the NFP also estimates the average number of hours worked and the average hourly and weekly earnings for all non-farm employees.

Employment Rate

Monthly report produced by the U.S. Bureau of Labor Statistics with details based on a survey of approximately 150,000 businesses and government agencies. Results are compiled on the number of people employed, hours worked, and earnings.

An increase in unemployment is seen as a negative indicator as job losses are typically triggered by a lower demand for goods and services. The obvious impact of rising unemployment is a decline in consumer spending as unemployment benefits do not cover the full wages workers earned earlier; a reduction in spending is an immediate response by affected households.

Add to this the fact that workers currently employed but feeling vulnerable with respect to their continued employment, also typically reduce spending in a bid to boost savings to prepare for possible job loss. This behavior further reduces consumer spending and can actually fuel additional layoffs.

Unemployment Rate

The unemployment rate is released by the U.S. Bureau of Labor Statistics and calculates the percentage of eligible workers not currently employed that are actively seeking work. An increase in unemployment is a negative sign highlighting the likelihood of a reduction in consumer spending. A prolonged period of rising unemployment may lead to economic recession.

Statistics such as average earnings and the number of new jobs created during the period are included in the report and this helps analysts determine if a trend is developing. Results are also provided on industry sectors so it is possible to gauge how well areas like manufacturing and mining are performing in comparison to the national average.

Unemployment Insurance Initial Claimants

Measures the number of new claims filed by people to receive unemployment benefits. This statistic provides very direct feedback on the number of newly-unemployed people.

When initial claims – that is, people filing for unemployment benefits for the first time – increases, this is a very strong indication of a weakening economy. If the number of initial claimants falls from the previous period, this suggest that the economy is creating more jobs which also suggests the economy is growing.

Employment figures are closely watched by investors. An expanding economy creates greater demand for a nation’s currency often resulting in an appreciation of the currency.

Housing Starts

The Housing Starts report reveals the number of new, privately-held homes for which construction began during the reporting period. The Housing Starts report is considered one of the most accurate indicators of the overall health of the economy and also reveals a great deal about the level of confidence the public has for their economic future.

New homes are likely the greatest single investment most individuals will make, and the majority of new home purchasers require long-term mortgages in order to buy their homes. If housing starts are increasing, this is a sure indication that there is sufficient money available in the financial system to fund new development. It also suggests that the public has the confidence to enter into mortgages as they feel they will be able to maintain the required payments.

On the other hand, if housing starts fall, it indicates a drop in demand for new homes and this is usually interpreted as an indication – or confirmation – of an economic slowdown. The housing industry is one of the country’s largest direct employers and also supports many spin-off industries that also rely on home sales to drive their business. Therefore, it is always a concern when the pace of housing starts falls.

Retail Sales

Provides feedback on consumer spending and is one of the first sales reports available each month. Only tracks spending on consumer goods exclusively and does not include expenditures on services such as health care and education. An increase in retails sales has a positive effect on the currency as it shows growth in the country’s economy.

The Retail Sales report is published without adjusting for inflation, so to get a true measure of real change in retail spending, you must adjust accordingly. It is not uncommon for the sales report to undergo significant revisions even after it is released as compiling accurate and complete retail sales data can be very difficult.

Core Retail Sales

The Core Retail Sales report provides the same information as the Retail Sales report but purposely excludes vehicle-related expenditures including new car sales and gasoline purchases. An increase in Core Retail Sales has a positive effect on the dollar as it shows growth in the economy.

The Retail Sales report is published without adjusting for inflation, so to get a true measure of real change in retail spending, you must adjust accordingly. It is not uncommon for the sales report to undergo significant revisions even after it is released as compiling accurate and complete retail sales data can be very difficult.

Consumer Price Index

Considered one of the most effective indicators revealing the current state of inflation in an economy. Inflation is necessary if the economy is to experience growth, but inflation exceeding 2% is generally seen as detrimental due to the erosion of the buying power of the dollar. When high inflation becomes a concern, investors abandon the currency in search of other investment options thus lowering the demand for the dollar on the FX markets.

CPI is a consumer-level analysis of the cost to buy a set basket of goods and services and is based on a starting index value of 100. If the CPI for the current period is 112, the indication is that it now costs 12% more to buy the same basket of goods today than it did when the index was first established. By comparing the monthly CPI data, you can easily detect changes in consumer buying power from month to month.

Core Consumer Price Index

The Core CPI is calculated in the same manner as the CPI but items with high volatility – such as energy and food – are excluded. Because these products are vulnerable to dramatic price swings, they can lead to a distortion in the CPI calculation. For this reason, the Core CPI is considered a more accurate measure of inflation.

Producer Price Index

The Producer Price Index (PPI) measures the change in prices that producers receive for their products on a month by month basis. A rising PPI is seen as a positive growth indicator which often leads to greater demand for the dollar.

Like the Consumer Price Index, the PPI compares the current price index to a base value of 100 – this means that a PPI value of 115 is 15% higher than the original base. Data is retrieved using surveys from various sectors including manufacturing, agriculture, mining, and utilities.

A rising PPI shows increased capacity for consumers to purchase goods. Therefore, a PPI increase within acceptable inflation and growth levels shows healthy economic expansion and this tends to increase demand for the dollar. Producers can continue to meet sales and production targets and this suggests continued employment levels. However, a PPI increase that exceeds acceptable growth levels could be a sign of inflation creeping into the economy.

Core Producer Price Index

Based on the Producer Price Index, the Core PPI excludes volatile items such as energy and food which can distort the PPI figures should there be a sudden spike in oil prices or other unexpected event. You should also note that the PPI report is the first of the inflation reports available each month so it usually receives close scrutiny as investors look for signs of inflationary pressures that could trigger interest rate changes.

Relative Annual Consumer Price Index – High Impact

Considered one of the most effective indicators revealing the current state of inflation in an economy. Inflation is necessary if the economy is to experience growth, but inflation exceeding 2% is generally seen as detrimental due to the erosion of the buying power of the dollar. When high inflation becomes a concern, investors abandon the currency in search of other investment options thus lowering the demand for the dollar on the FX markets.

CPI is a consumer-level analysis of the cost to buy a set basket of goods and services and is based on a starting index value of 100. If the CPI for the current period is 112, the indication is that it now costs 12% more to buy the same basket of goods today than it did when the index was first established. By comparing the monthly CPI data, you can easily detect changes in consumer buying power from month to month.

Industrial Production Index (IPI)

Shows the monthly change in production for major industrial sectors and is expressed in the form of an index number of 100. 2002 serves as the current base year and an index less than 100 means that the IPI is lower that the original base period, while a result exceeding 100, indicates growth.

The Federal Reserve publishes the Industrial Production Index each month and it is used to gauge capacity utilization rates in the manufacturing, mining, and electric and gas sectors. Manufacturing accounts for most of the input for this report.

The IPI is very much in step with the business cycle and is considered an accurate barometer of manufacturing employment, average earnings, and personal income. A month-over-month increase in IPI suggests that companies in the industry are performing well and this will influence the markets. However, because the IPI covers only a limited aspect of the economy, it is not considered a high impact indicator.

Purchasing Manager's Index (PMI)

The Purchasing Manager's Index (PMI), is part of the Institute of Supply Management (ISM) report and uses a base scale of 50 to show changes in growth for the manufacturing industry. An index of less than 50 means the industry is contracting from the original base period, while a result exceeding 50, indicates growth. Results are adjusted to take into account seasonal changes in the industry.

The ISM is considered the most accurate gauge of overall factory production – the information on new orders is especially insightful as it highlights manufacturing activity for the upcoming time period. While not as useful for detecting inflation as the CPI, the ISM is still considered to be one of the key indicators of the inflationary pressures in the economy. For these reasons, it is a highly anticipated report.

Trade Balance

Compares the total value of imports and the total value of exports for the reporting period. A negative value indicates that more goods were imported than were exported (trade deficit) – conversely, a positive trade balance means that exports exceeded imports (trade surplus). This report is used by currency investors to determine demand for the dollar.

In the case of a trade surplus or a decreasing trade deficit from the previous month, it naturally follows that countries importing goods must convert their currency to the domestic currency of the country supplying the goods. This results in an increased demand for the domestic currency thereby increasing its value.

In the case of a trade deficit or a trend towards a decreasing trade surplus, the importing country must convert more of their currency to the currency of the country from which they are buying goods. This leads to an increased supply of the domestic currency on the forex markets which could cause the domestic currency to lose value against other currencies.

Current Account

Shows the total inflow of new capital into a country. It is calculated as the total Trade Balance (exports minus imports), plus the net of income payments (interest and dividends), plus all unilateral transfers (foreign aid, taxes, and one-way gifts).

If the resulting number is positive, it shows a Current Account surplus; a negative value is a Current Account deficit. Note that a deficit indicates that more money left the country than entered the country in the form of exports and other transfers.

Treasury International Capital System

Produced each month, this report shows the difference between long-term foreign securities purchased by U.S. investors, and long-term U.S. securities purchased by foreign investors. When the amount of foreign investment increases, this leads to an increase in demand for U.S. dollars on the FX market.

Currency traders pay close attention to this metric as it provides insight into immediate currency conversion needs. If the amount of foreign investment appears to be increasing in the U.S., then it is likely that the demand for U.S. dollars will increase on the FX markets as well.

The Treasury Inflation Capital System report also provides insight into investor confidence in the U.S. economy. If investment dollars are flowing out from the country, this is a clear indication of a lack of confidence in the long-term investment in U.S. securities – a net increase in investment dollars flowing in to the U.S. indicates a growing level of confidence.

Refinery Capacity

One of several gasoline usage and consumption reports produced by the Energy Information Administration, the Refinery Capacity report details the weekly totals that U.S. refineries can process crude oil into gasoline and other consumer oil-based products.

Refinery capacity is instrumental in maintaining domestic inventories – if the inventory levels decrease resulting in a shrinking supply, energy prices can be expected to increase. An increase in energy costs – everything from gasoline for cars to heating fuels for home furnaces – can spur inflation which governments often counter with cuts to interest rates. A reduction in interest rates makes the dollar less appealing as an investment as returns diminish as interest rates drop.

Moody’s AAA Corporate Bond

The Moody’s AAA Corporate Bond is an investment bond comprised of all bond issuers rated AAA by Moody’s. This is the highest rating that Moody’s assigns when evaluating corporate or government-issued bonds.

Moody’s Corporation offers a highly-respected credit-rating service based on its independent research of corporations with a specialty in the rating of bonds issued by private firms. Moody’s also rates bonds issued by municipal governments.

Moody’s rates bond issuers with respect to the likelihood that they will be able to meet the obligations of the bond debt and employs a rating of “Investment Grade” as the highest category, followed by “Speculative Grade”. AAA is the highest rating it offers within the Investment Grade category.

The AAA Corporate Bond is comprised of bond maturities of twenty to thirty years . Bonds with less than twenty years to maturity – or ones that suffer a downgrade – are dropped from the index and analysts often look at changes to the entities listed in the bond and note those that suffer a down-grade in status. This information can provide insight into the overall health of the economy as companies and even governments can find themselves struggling in a weak economy.

Moody’s BAA Corporate Bond

The Moody’s BAA Corporate Bond is an investment bond comprised of all companies that are rated BAAby Moody’s. BBB is the lowest rating within Moody’s top “Investment Grade” category.

Moody’s Corporation offers a highly-respected credit-rating service based on its independent research of corporations with a specialty in the rating of bonds issued by private firms. Moody’s also rates bonds issued by municipal governments.

Moody’s rates bond issuers with respect to the likelihood that they will be able to meet the obligations of the bond debt and employs a rating of “Investment Grade” as the highest category, followed by “Speculative Grade”. BBB is the lowest rating it offers within the Investment Grade category, and any rating below this level is relegated to “Speculative Grade” or more euphemistically, “junk” status.