1. FED CHALLENGE MEETING
OCTOBER 8, 2012
WEEK 3
Review of Leading Economic Indicators

2. LEADING ECONOMIC INDICATORS
Gross Domestic Product (GDP)* Consumption
(Fixed) Investment Change in Inventories*
Government Consumption Net Exports
Price Deflators of GDP Personal Savings Rate
Car Sales National Association of Purchasing Managers
Employment - Payroll Jobs* Unemployment Rate
Average Hourly Earnings* Real Earnings
Initial Jobless Claims Employment Cost Index (ECI)
Producer Price Index (PPI)* Retail Sales
Industrial Production Capacity Utilization
Housing Starts (/Building Permits) Consumer Price Index (CPI)*
(Business) Productivity and Costs Durable Goods Orders
Business Inventories (and Sales) Wholesale Trade Sales
Personal Income and Consumption Expenditures
Index of Leading Economic Indicators*
Philadelphia Fed Survey New Home Sales
Existing Home Sales Housing Completions
Construction Spending Factory Orders (and Manufacturing Inventories)
International Trade (Exports, Imports, Trade Balance)
Import/Export Price Indexes Current Account
Consumer Confidence Consumer Credit
Beige Book Report Monetary Aggregates
*Discussed in this Presentation

3. GROSS DOMESTIC PRODUCT (“GDP”) –
MOST IMPORTANT ECONOMIC INDICATOR
 Measure of overall income and production
 GDP – Market Value (“MV”) of current, final, domestic
production for a given time interval
 Prepared Quarterly by the Bureau of Economic Analysis
(“BEA”)
 Volatility = Moderate
 Compiled from sources such as:
• (i) tax returns;
• (ii) labor and price data; and
• (iii) Census Bureau information.

4. GROSS DOMESTIC PRODUCT BREAKDOWN
Value – Amount of
money actually paid by
transactions.
Domestic –
Production within
national borders, Current – Production
regardless of foreign measured during a set
ownership with country period of time
or domestic ownership
of foreign capital
Gross – Total amount Gross Final – Sales of good
in intermediate stages
of output, regardless of
existing stock of past Domestic are disregarded.
(avoids double
outputs
Product counting)

5. CAUTIONS OF INTERPRETATION
 Not designed to measure economic welfare
 Some measures of economic welfare not included.
 Definitions should be examined closely
 Appropriate application of definitions.
 Real vs. Nominal GDP
 Price data needs to be dependable
 Data comes to BEA from other agencies
 Some data may be inaccurate / not well-suited for NIPA

6. METHODS OF MEASURING GDP
 Two ways of measuring GDP:
 Income Approach
 Expenditures Approach
Theoretically equal because every
financial transaction entails expenditure for the
buyer and revenue for the seller.

7. INCOME APPROACH
Wages / salary / fringe benefits /
Compensation
payments to Social Security / of Employees
unemployment insurance taxes
Profits
Corporate tax returns
GDP
Non-incorporated businesses / Other forms of
Income
Rental income / Royalties /
Interest Income
Non-Income
Indirect taxes / Items
State and Local taxes

8. EXPENDITURES APPROACH


10. LIKELY IMPACT ON FINANCIAL MARKETS
Example – Unexpectedly high Quarterly Growth
 Interest Rates:
Bond
Prices
Drop
Inflation –
Fed may
raise Fed
Funds Rate
Interest
Rates and
Yields
Rise
 Stock Prices: Ambiguous. E(growth) = increase ∏
E(inflation) = increase I
 Exchange Rates: Appreciation of exchange rate

11. US HISTORY AND GDP
 Traditionally, average growth rate ∈ ( 2.5% , 3% )
 Economic growth above this „natural‟ rate cannot be
sustained for too long
 Fed Reserve would increase Fed Funds Rate
→ (tight monetary policy)
 During Recession Fed decreases Fed Funds Rate
→ (expansionary monetary policy)

12. CHANGE IN INVENTORIES (“∆ INVENTORY”)
 Smallest component of GDP, usually < 1%
 *Much more important than weight in GDP
 Signals changes in Aggregate Demand – future
economic activity
 ∆Inventory = ∆stock of unsold goods
 Published on a quarterly basis
 Volatility = high

14. LIKELY IMPACT ON FINANCIAL MARKETS
 Interest Rates : Indicates Inventory
expectations for inflation
Interest Rates
 Stock Prices : Ambiguous as
shown below
Bullish effect on
Stock Price Expectations for
Recession
Interest Rates Corporate
Profits
 Exchange Rates: No strong effect.

15. EMPLOYMENT – PAYROLL JOBS
 Most significant monthly economic indicator reported
 Provides a signal early each month about the
employment conditions in the previous month
 Moderately Volatile
 Referred to as “the king of kings,” provides for:
(i) Employment;
(ii) Average Workweek;
(iii) Hourly earnings; and
(iv) The unemployment Rate

18. LIKELY IMPACT ON FINANCIAL MARKETS
 Interest Rates: