Watch These Six Economic Indicators as You Manage Your Finances.

Sunday, Apr 17 2016 08:31 AM

SINGAPORE — GDP. NODX. CPI. Every month these or a slew of other economic indicators flood the media. The challenge is figuring out which ones are important, what they actually mean, and how they affect your wallet and investments.

A Framework

Economic indicators are important for investors because they show trends in the economy, which can affect everything from profitability in specific industries or companies to the interest rates on deposits and bonds. Tracking trends in these indicators can help investors decide where to place their money and whether to shift into different types of investments.

Which Indicators to Follow

While there are indeed many indicators, a small number can provide excellent insights about the economic outlook.

GDP: Gross Domestic Product (GDP) is the broadest indicator about the economy, showing the value of all goods and services produced in the country. The GDP growth rate shows how fast the economy is growing or slowing. Investors should look at what factors are driving GDP growth, such as increases or decreases in manufacturing or services, to assess whether economic fundamentals will lead to their investments increasing or decreasing. No growth in GDP from the fourth quarter of 2015 to the first quarter of 2016 means economic growth may be continuing to slow, for example, even though GDP grew 1.8 per cent compared to a year earlier.

CPI: The Consumer Price Index (CPI) measures the average price changes in a basket of consumption goods and services commonly purchased by resident households, according to the Department of Statistics. A “core” index excludes rent and cars, which are more volatile. Government policies may change depending on whether the index indicates that prices are rising or falling.

Employment: Employment shows the number of residents and non-residents working in Singapore, both in total and in various sectors of the economy. “Employment is the one most personally felt,” as investment advisory firm Kiplinger describes it, because “these are people’s jobs we’re talking about. Consumers are the engine of our economy, and when their spending flags, business feels it.” Business costs may increase and inflation may rise if labour is scarce and wages go up, so investors can use employment data to assess corporate profitability and government policies.

NODX: In a country where trade is so important, non-oil domestic exports (NODX) data is essential for assessing the health of Singapore’s overall exports as well individual sectors such as electronics or petrochemicals, and exports to specific countries such as China or South Korea. Rising or declining exports can indicate strengths or weaknesses in industry sectors and specific companies.

Retail Sales Index: The Retail Sales Index and the Food and Beverage Services Index measure short-term performance of the retail and F&B industries. Retail and F&B are a big part of the economy, so trends in these indices indicate whether consumers are optimistic about the economic outlook as well as whether they will increase or decrease their spending.

PMI: The Purchasing Managers’ Index shows whether manufacturing in Singapore is growing or contracting. A reading above 50 means that the manufacturing economy is generally expanding, while a reading below 50 indicates contraction.

Investors looking for a broader assessment of the economic outlook can also use the MAS Policy Statement, which is published twice a year. MAS provides its forecast for the economy and outlines the policy it will take regarding foreign exchange rates.

What’s Important

Watching each of these indicators regularly is beneficial, and assessing each one as well as how it fits into the current economic situation can give good insights into growth prospects for investments. What is equally or even more important is watching trends over the course of several months. Whereas a change in a particular indicator may result from specific factors such as Chinese New Year, ongoing increases or decreases would show longer-term shifts in outlook.

Omega Wealth Management President Lisa Kirchenbauer explained that investors should not necessarily react based on just one data point, even if markets immediately react to it. Even though one indicator may sway the market for a day or two, she said, the key to understanding indicators is to spot larger trends that will affect the market over the longer term.

Along with watching data from Singapore, looking at data from other markets can also be helpful. As DBS Bank economist Philip Wee said, “in practice, we spend more time watching the indicators of our major trading partners, namely, the US, Eurozone and China, and how they affect their markets.” Whether the US Fed delays interest rate hikes, which can affect rates in Singapore, may depend on factors such as how strong employment or GDP growth is in the US. Also, Wee noted, “it is no longer simply stronger data implies better markets.”

While the range of indicators may seem a bit overwhelming, watching a select few can help you to decide where to invest. And as the American Association of Independent Investors said, even if you don’t follow the indicators in detail yourself, it is helpful to know where the “experts” are drawing their opinions from. The key is to remember that even though data can change rapidly, following key indicators and watching broad trends are most beneficial for managing your finances well.



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