Economic Indicators – Sourcing Data To Drive Investing

Economic indicators are essential data for investors – providing the macroeconomic information needed to predict market changes, highlight opportunities and make informed investment decisions.

Following economic indicators is not easy unless you have a background or interest in analysing data. One of the issues is that most publications and sources are supplied as raw data without context.

Still, understanding those raw metrics can be an essential asset in balancing investment portfolios.

It’s almost impossible for individual investors to collate the volume of statistics and data involved in producing reports on indicators like the Consumer Price Index (CPI), where briefs from the government or non-profit organisations come into play.

Read on to find out how to source and use data supplied by economic indicators.

UK Economic Indicators Explained

Indicators come in several shapes and sizes and refer to any report, data or information that explains what’s happening within the economy.

Of course, that can change rapidly, depending on various factors, at home and abroad.

The point is that an investor needs to have a decent idea about the economic conditions before making a judgement call on their position.

Some of the most reliable sources include:

Markets can move quickly when new economic indicator reports are published, so it pays to stay ahead and ensure you are equipped with the information to respond accordingly.

If you only have time to look at one set of indicators, try the ONS, the official provider of independent statistics. The main categories to look under are:

Gross Domestic Product

GDP refers to the value of all products and services produced within the UK. Changes to GDP reflect economic growth and advancements in the five major sectors:

  • Agriculture
  • Production
  • Manufacturing
  • Services
  • Construction

The ONS produces three reports each quarter. The first is an estimate, the second is an updated forecast, and the third is a confirmed publication that shows how GDP has moved in the three months.

Employment Statistics

Indicators rolled up in employment statistics include:

  • Unemployment rates
  • Counts of unemployment benefit claimants
  • Average earnings per week, person or household
  • The volume of job vacancies
  • Net changes to employment metrics
  • Economic inactivity

Investors review employment figures as a contributing factor, predicting future interest rates, the economy’s strength in different sectors, and if the economy is growing or contracting.

Low unemployment usually means that interest rates will rise.

Hence, markets start to shift depending on the data – published every month by the Labour Force Survey (LFS) analysing UK employment levels over a three-month moving average.

Consumer Price Index

The Consumer Price Index (CPI) and Price Index (PPI) have been in the spotlight over the last few months as traders observe the markets to evaluate economic recovery post-pandemic, alongside inflation.

The monthly report looks at a basket of products and average prices to show how consumer prices are changing.

This inflation measure shows monthly and annual adjustments, and the British government uses it to monitor inflation targets, index pensions and assess wages and benefits.

Trade Input and Output

Every quarter, the ONS summarises trades between the UK and every other country, with detailed information on:

  • Capital transfers
  • UK transactions in external assets
  • National liabilities and debt
  • Trades in goods and services
  • Nationwide trade income

The ‘balance of payments’ data impacts the value of Sterling and shows UK assets as a percentage of GDP and compares the results with both European Union and countries farther afield.

Average Expenditure by Household

Household expenditure is another macroeconomic indicator, giving an overview of consumer spending, personal savings, economic production and investment spending.

Every household contributes to the economy, so knowing how those average contributions are changing and the outcome of aggregate demand can highlight industries and sectors that present a profitable investment opportunity.

The ONS quarterly Consumer Trends report shows prices and volume adjusted for inflation and reflects around 60 per cent of the spending that feeds into GDP.

Retail Activity

Retail sales metrics are produced every month and show changes year-on-year and month-on-month.

Figures are compiled from monthly surveys involving 5,000 retailers – including all businesses that employ at least 100 staff in the retail industry.

The retail sales reports also consider contributions to sales growth across the four major retail sectors:

  • Food: supermarkets, alcoholic drinks, tobacco and specialist food retailers.
  • Non-food: clothing, footwear, household goods, textiles and department stores.
  • Non-store retail: online, catalogue and mail-order retail.
  • Automotive fuel: petrol stations.

Production Indices

The ONS report on the UK Index of Production considers economic indicators that account for more than 15 per cent of GDP as an early growth indicator.

Production metrics measure output in energy and water supply, mining, manufacturing and waste management.

Each value on the index is measured against the value of 2015, so a value of 115 means that output was 15 per cent higher than the value seven years ago.

Consumer Confidence Surveys

Research organisation Growth from Knowledge provides sentiment surveys feeding back on how consumers feel about the economy in the UK and Europe.

Indicators above zero show a positive outlook, and vice versa for negative indicators, analysing members across the UK and EU to survey four key indicators:

  • Economic predictions
  • Income expectations
  • Appetite for spending
  • The consumer climate

The Halifax House Price Index

Property makes up a significant chunk of UK investment capital, and investors use the Halifax House Price Index because it’s the longest standing price series, including data from 1983 to today.

Data impacts standardised house prices, and annual changes are calculated every three months to ignore short-term fluctuations.

Traders can use this index to keep track of broader economic trends and potential changes to the real estate market as a whole – whether or not they have property investments within their portfolios.

Public Sector Debt and Spending

National debt and spending might not seem an immediate concern for investors, but it is another crucial economic indicator.

Higher government debt levels can impact institutional investors by tightening credit availability, whereas higher spending puts pressure on interest rates and private investment levels.

The ONS Public Sector Finances bulletin includes data on spending, investment, borrowing, and debt, allowing traders to assess the government’s fiscal activity independently.

Economic Indicators – Sourcing The Data To Drive Investing FAQ

How do investors use economic indicators to make decisions?

Economic data requires analysis, but reports provide information that helps investors review opportunities and make portfolio adjustments. Statistics measure current economic conditions, forecast trends and create technical chart patterns that traders refer to, derived from price, volume or demand for particular securities.

Why do investors need to track economic indicators?

Macroeconomic data such as a GDP analysis is essential to understand how industries and businesses are performing, showing how capital markets may be changing direction. Without a grasp of the overall economic position, an investor can’t make intelligent choices.

What is the most important economic indicator for investors?

Although every economic indicator can provide valuable insights, GDP is often the most crucial, particularly for equity investors who rely on corporate profits to earn returns. This is because GDP shows what the economy is producing, whether growing or contracting and forecasts growth rates in critical sectors.

How do relevant economic indicators change for global investors?

Looking at the prominent economic indicators for the UK market is OK for anyone investing in British companies. Still, global investors need to apply the same analysis and research on a broader scale.

GDP and CPI remain relevant, but multiple data points predict economic changes per country to allow for strategic portfolio adjustments. The Federal Reserve in the US publishes the Beige Book, showing information about economic conditions.

You can access similar information from sources like the Bank of Japan and the European Central Bank, depending on the jurisdiction of your investment assets.

Investors also refer to the Purchasing Managers Index (PMI) produced by the Institute for Supply Management and the Markit Group, which tracks financial markets to analyse demand.

Should I track multiple economic indicators as a retail investor?

Yes, if you’re a private investor, it remains essential to know how the economic conditions you’re trading in are likely to change in the months ahead.

Indicators have relative strengths and limitations in the information available, so the best approach is to use as many indicators as possible in tandem to get an overview of the big picture.

Some investors refer to a couple of specific economic indicators they’re most familiar with (or that have the most relevance).

Still, expert knowledge is useful to conduct analysis and use the information to a tactical advantage.

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