Key economic indicators

So now that you are carefully watching lists of economic indicators, what should you be looking for, and in particular, what indicators should you pay attention to? There are several things to consider.
First, recognize that not everything in an economic report is relevant. If you get too involved with the details of a given report, you’ll miss the big picture. You simply don’t have time to analyze and digest each economic report. Look at the headlines or find a news source that will give you the important details in a few words.

Second, be aware of the distinction between leading and lagging indicators. Lagging indicators tell you about a trend in the economy after it has already happened, and their primary benefit is to confirm changes. Leading indicators tell you before it happens that a trend might be just around the corner. These indicators are predictors.

Third, learn to care about what the market cares about. For instance, it might be natural enough to watch the headline of the employment report when monitoring jobs, but experienced traders typically watch the non-farm payrolls. As a result, this indicator has the greatest influence on the market and makes the most difference for forex trading. In a similar example, PPI shows the general trend in producer prices, but traders tend to watch PPI excluding food and energy, since these factors are far too volatile. The best way to learn what to watch is to ask an experienced trader for advice.

Fourth, recognize that economic reports are not final. It is quite common for revisions or corrections to be issued later, and many economic reports are criticized or debated by economic historians for years afterward.

In a certain sense, a real-world trader has little reason to be concerned by this. Your interest in economic indicators pertains to the influence they might have on the market—not on the theoretical details of how accurate they are. Try not to think of economic indicators as distortion-free windows into the absolute truth about the economy. Instead, regard them for what they are—powerful influences on the market, based on important information that may be accurate. Since what matters most to a trader is the response of the market, your ultimate concern is with how other traders respond. Therefore, take these indicators seriously, but recognize that adjustments can and will happen.

This also helps to explain why two reports may carry conflicting information. Rather than give up on reports altogether, you should recognize that they will both influence the market. Take advantage of both opportunities by responding wisely.

So what are the major indicators and which should you watch? The biggest growth indicator is GDP (gross domestic product). This simply measures the sum of all goods and services in a country. More narrowly, industrial production measures how much is produced in a nation’s factories, mines, or utilities. PMI monitors total manufacturing conditions, including prices, new orders, inventories, employment, among other things. Orders for products that last more than three years of use is measured by durable good orders. When this goes down, it probably indicates reticence to spend and possibly fear.

The producer price index (PPI) and consumer price index (CPI) measure the average prices for sellers and buyers. This is one of the best ways to measure inflation—another immensely important indicator for forex analysis.
Of course, there are many smaller indicators and sub-indices to watch as well. These provide a great foundation for analysis. If you can consistently watch these indicators and others, your trading will show the positive results.