reading economic reports

7/29/2019 Reading economic reports

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T E C H N I Q U E SGiven the important role thot economic data plays in the behavior of thefinancial markets, it is crucial for investors to have an understanding ofhow to read these reports and how to use that data.

Reading economicreports

BY AN THO NY CRESCENZl

M ost retail traders would besijipri-sed at how liiile niiinyprofessional rraders onWall Street know abouteconomic reports. Wilh a litrlc work,anyone can take their knowledgero a level thar many on Wall Street takeyears ro oh ta i i i and thar somenever achieve.The frequency of economic releasesmakes It easy tounderstand economicdata and how it affects the markets.The frequenr re leases a lso makeit easy to spot parrems in rhe way thedata behaves and thus draw conn-

ections from one economic indicatorto the nexr because they are all,ultimately, intertwined.Expert knowledge of e c o n o m icreports can provide greater personalreward rhan theoretical academic workbecause it ciin be applied. There's nosubstitute for knowledge rhat has appli-cation value. In tbis case, we are talkingabout making you a better investorthrough a grearer understanding of howro use ecotiomic reports.

MONTH TOMONTHLook closely at economic calendars

from one month ro tbe next and you'llsee rhat rhey look alike, wirh mosteconomic reports re leased aroundrhe same da te each month (seeDateline, page 66),

Also notable is the large role thatmanufacturing-related data play in th ecalendar, This might surprise some,given that the U.S. economy is largely aser\'ice-orienred economy, witb factoryactivity accounting for only around15% of activity, and the service sectoraccountin g for about 65%.Tbere are acouple of reasons for thecalendar makeup. For one, the govern-

ment has been skiw to respond tci thesecular decline in the U.S. tactor>' sec-tor. In fact, the or\Jy major service-relat-ed economic report is the non manufac-turing index released monthly by theInstitute for Supply Management, a pri-vate organization. The government isfailing rhe markers in rhis respect.Second, activity in the service sec-tor is much more difficult to measure.It's easier, for example, to measure themonthly output of automobiles rhan

to track the activity of land.scapers,repa i rman , lawyers , ha i r and na i lsalons, and so on.

Most times, the focus on factoactivity is appropriate because it is reresemadve of the overall econotny: tmany factors that impact the factosector also impact ibe service sector, example. Still, there have been plenof occasions when rhe factory sectsent misleading .signals on the state the overall economy.

Nevertheless, due tothe makeup rhe economic calendar, the lx)nd mket Is heavily influenced by the factosector, which is why it is so important get a grip on factory activity most of alNUMBERS DONT LIELX'vising agixxJ forecast on the econmy is challenging, but the task is maeasier when you ler instincts and facguide your forecasts. Many economforecasters approach forecasting far tconservatively and rarely think outsiof the box, clustering their forecasaniund a safe place: the consensuHence, they miss making great calThey are more comfortable knowirhey will be less open ro criticismtheir peers are also wrong.Th e conservative tiature of forecaste


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ry analysts before the ecitiity bubble burstin 2000. Analysts staxl by rosy forecastson stocks and were reluctant to issue sellrecommenLl;iti(ms when the environ-ment clearly called tor it. In tact, lessthan 1 % of analyst stock recoinmenda-rioas at tha t time were sells.

As a trader with ytuir own money ont\e line you need to be willing to makeforecasts that are somet imes farremoved trom the ctmsensus. Don'tbuck the trend just tor the sake of doingso, but lei your forecasts be dictatetl bynumbers; num bers don't lie. In doing so,you will find yourself delivering accuratef(iri;casts wben the crowd is wrong.

When making :in economic forecast,think like adetective who is on a mis-sion to collect as many relevant facts asp


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T r a d in g T e c h n i q u e s

can signiticantly enhance your forecast-ing ability by teaming more about thesurvey methodology for the economicreports. This will give you an edge onother market participants who oftenhave scant knowledge about the data.An important premise to rememberis tha t ac tua l econ om ic da ta candiffer greatly from the r e p o r t e dd a ta . S t a t i s t i c i a n s see to it t h a traw data are altered to smooth outseasonal fluctuations.

Coasider the sale of Christmas trees,tor example. Sales increase substantiallyin December before nose-diving inJanuary . S ta t i s t ic ians a t tempt to"smiX)th," or seastmally adjust, the fluc-tuations by adjusting the December datadownward and the January data upward.W h o , after all, wants to hear that satesruse 4OO'X. in December but fell 400% inJanuary? By recognising how data arealtered, you can find situations where

the adjustments might be ttio much ortoo little under various circumstances.Track also how economic data arecollected; specifically tbe survey cutoft

dates because most are not at montli'send. In January, for example, a snow-st


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reading economic reports

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