Overview, Knowing the US Dollar, How To Read US Economy

How to read the US Economy

Unemployment Rate

This is one of the most important indicators of the US Economy. One can find out the current state of Unemployment through the Employment Report, published monthly. If the unemployment rate is high, it is bound to force the political circle to influence the Federal Reserve to ease off the interest rates to encourage borrowing to set up industries, thereby increasing the employment opportunities. As has been discussed earlier (previous sections), any change in the interest rates is bound to have a strong influence on the strength of the US Dollar. The Employment Report consists of data from the Establishment Survey and Household Survey carried out in various sectors of the US Economy and has to be watched closely.

The Consumer Price Index

The state of Inflation in the US Economy can be known through the Consumer Price Index, (CPI). As has been shown under the section on The Federal Reserve, any inflationary tendencies would invite countermeasures from the Fed like hardening of the interest rates, which in turn is bound to influence the US Dollar. Of particular interest to economists and foreign exchange consultants is the term called 'Core Inflation rate' which does not include the food and energy prices while calculating Inflation.

The Producer Price Index

The Producer Price Index (PPI) reflects the changes in the prices of goods received by its US producers for industries ranging from Manufacturing to Agriculture. The PPI is of particular interest to Foreign exchange traders as it can influence the rate of return on investments in those sectors and subsequently encourage or discourage investments into the US economy.

The Gross Domestic Product

The Gross Domestic Product (GDP) is one of the most important indicators of the state of health of not only the US, but any economy. Two types of GDPs- based on Income & Expenditures - are prepared by the Bureau of Economic Affairs. For beginners, GDP indicates the net production and consumption of goods and services. As a trader who is interested in advance information, one should watch out for the advance release of the GDP from the Bureau of Economic Affairs immediately after the end of each quarter.

Balance of Trade

This is considered to be important for the US because it indicates the amount of Trade deficit - i.e. the difference between the net Exports and Imports into the US. A higher Trade deficit would significantly weaken the US Dollar in the absence of sufficient flow of foreign funds into the US. It is more reliable to consider the Trade Deficit on a quarterly basis rather on a monthly basis.

The Employer Cost Index

This is the favourite indicator of the US Federal Reserve. The Employer Cost Index (ECI) is calculated on a quarterly basis and it basically gives an idea about the cost to the employer on account of his workforce AND all other cost factors. The ECI has been found to be a stable index over the years.

Survey by Institute for Supply Management

This survey is aimed at finding out the rate of expansion or contraction of the economy. It is conducted by the Institute for Supply Management (ISM), and of late, the Fed Reserve Chairman has shown his interest in its findings. Basically it works like this: ISM asks the Purchase Managers from the Manufacturing Sector across the US about their purchase requirements for immediate/short term future. Their optimism or pessimism is reflected in the index calculated, which if below the value of 50 is considered to forecast a expanding economy while a figure lower than that is indicative of a shrinking economy.

Index of Industrial Production

This index is based on the monthly output of various kinds of industries in the United States. There are several of these indexes, based on the type of industry. A little consideration of the previous discussions would show that any increase in the output (and the index) indicates the strengthening of the US economy and hence the US Dollar.

Consumer Confidence Survey

This survey is conducted to get a feel of the confidence expressed by the US households in the US Economy. They are quizzed with regard to their optimism or otherwise on Employment, family income and business conditions - both in the current term and also in the past 6 months. Seasonal adjustment of the responses is carried out and the aggregate index is calculated. Higher consumer confidence will surely increase consumer spending and may lead to inflationary tendencies. This can invite countermeasures on the Interest rates from the Fed and the Dollar could be affected.

The Retail Sales Index

Like the Consumer Confidence Survey, the Retail Sales Index also measures the consumer confidence and consumption. The survey is carried out among retail stores to also find whether any hoarding is taking place. Items which are known for vide monthly variation in sales (E.g.: Automobiles) are not included in the survey. This index can be considered as important as the Consumer Confidence Index and reflects on the state of the US Economy.

Overview, Knowing the US Dollar, How To Read US Economy