Interpreting macroeconomic signals

Thomas R.

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Interpreting macroeconomic signals

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Themes

economy, macroeconomy, economic indicators, macroeconomic signals, investment strategies, investment, stock market, gdp gross domestic product, inflation, equities, market expectations, Federal Reserve System, economic aggregate, labour market, CPI Consumer Price Index, PPI Producer Price Index, recession, NAIRU, fiscal easing, fiscal tightening, exchanges, public debt

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Abstract

As an economist, what you need to forecast is not so much the end value of the economic indicators. Indeed, markets already have some believes and price in those expectations. What is important to forecast is what the markets are going to change their expectations and when this will occur. To be able to do so, economists must recognize early signals of change in the data and assessing the probability that signals may deviate from their most likely path. They will make scenarios and compare them with the ones that the markets already have in mind.
For example, the leading economic indicator of GDP is only known 1 year after the actual economic activity occurred. Markets do not care about GDP levels because they are forward-looking: what matters is the expected future cash flows their investment will generate in the coming months or years.

Basics about data interpretation
Output inflation and labour market figures
Short-term economic signals
Economic participants' reaction to signals

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[...] The World PMI reflects the collective performance of manufacturing sectors across multiple countries. As manufacturing activity tends to be closely linked to international trade, changes in the World PMI can provide early signals of shifts in global trade dynamics. Increases in the World PMI often indicate rising demand for manufactured goods, which can translate into increased international trade activity. One of the key components of the PMI is new orders, which measures the level of new orders received by manufacturing firms. [...]

[...] The effect is very different depending on which stage the economy is in terms of economic cycle. The cyclical position of the economy. There is a larger effect when the economy is below potential (Trump stimulus not very efficient). Multipliers are higher for government spending than tax cuts. Multipliers are higher if the economy is below potential than if it is close to potential. Public guarantees on private loans: Public guarantees on private loans are indeed a potent tool used by governments to provide reassurance and stability to the economy, particularly during times of crisis like the COVID-19 pandemic. [...]

[...] They are counted as part of the labour force but are not working as many hours as they would like due to economic reasons. Additionally, U6 incorporates individuals who are marginally attached to the labour force. These are individuals who want to work and have looked for a job in the past 12 months but are not currently actively seeking employment. They may have become discouraged by the job market or faced other barriers to employment. Participation rates are also very important to consider demographic trends. [...]

[...] The Sahm Rule uses a specific threshold to determine when a recession signal is triggered. The threshold is set at a 0.5 percentage point increase in the national unemployment rate relative to its lowest level over the previous 12 months. The employment rate is not enough to gauge the state of the labour market. The augmented unemployment rate also includes individuals who are working part-time for economic reasons, meaning they are employed but would prefer full-time employment. These individuals are often referred to as "involuntary part-time workers" or "underemployed" individuals. [...]

[...] This can lead to a strengthening of the domestic currency as foreign investors are attracted to the country's robust economic prospects. The example of the USA: The United States, with its status as a global economic powerhouse and issuer of the world's primary reserve currency (the US dollar), often experiences unique dynamics regarding its exchange rate. Fiscal stimulus measures in the US can have significant spillover effects on the global economy, influencing investor sentiment and capital flows. This can lead to fluctuations in the US dollar exchange rate, with periods of appreciation or depreciation depending on various factors, including global economic conditions, monetary policy expectations, and geopolitical developments. [...]

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