Here are 4 economic indicators that impact stocks and investors must pay attention to
Nick Sundich, August 19, 2024
There are several economic indicators that impact stocks, both on the ASX and internationally. Whenever data is released, it can swing market indices in a particular direction, sometimes the opposite direction to where it had been heading earlier in the day. This is not only if the data changes from one period to another, but even if it does not exactly match consensus estimates. There are many economic indicators, but we thought we’d look at 4.
5 economic indicators that impact stocks and why they have an impact
GDP
Gross Domestic Product (GDP) is a key economic indicator that measures the total value of all goods and services produced within a country’s borders over a specific period, typically a quarter or a year. It reflects the overall economic health of a country and is often used to gauge the size and performance of an economy.
Why are stocks impacted when GDP Is Released? Because a growing GDP usually signals a healthy economy, which can boost investor confidence. This may lead to higher stock prices as businesses are likely to perform well in a strong economy. It often suggests that companies are likely experiencing higher sales and profits, leading to increased earnings.
GDP data can influence investor sentiment. Positive GDP growth can lead to bullish market behaviour, where investors are more likely to buy stocks, while negative or slowing GDP growth can lead to bearish market behaviour, with investors selling off stocks in anticipation of tougher economic conditions.
Unemployment
In the US there’s actually a term for the day unemployment data is released: ‘Jobs Day’. It is the first Friday of every month on Wall Street, whilst in Australia it is a Thursday in the middle of each month when our own ABS releases data.
Unemployment refers to the percentage of the labour force that is actively seeking employment but is unable to find work. It is a key economic indicator that reflects the health of the labour market and the overall economy. The unemployment rate is calculated by dividing the number of unemployed individuals by the total labour force and is expressed as a percentage.
Job numbers, such as the unemployment rate and nonfarm payrolls (which track the number of jobs added or lost in the economy), are closely watched as indicators of economic health. A low unemployment rate typically indicates a strong economy with high levels of consumer spending, which can boost corporate earnings and stock prices. Conversely, high unemployment may signal economic weakness, leading to lower consumer spending and corporate profits, which can negatively impact stocks.
Moreover, employment levels are directly tied to consumer spending, which is a major component of GDP. When more people are employed, they have more disposable income to spend on goods and services, which drives demand and supports business growth. Strong job numbers can lead to higher consumer confidence and spending, positively impacting stocks. On the other hand, weak job numbers can reduce consumer spending, hurting businesses and causing stock prices to decline.
Companies benefit from a robust labour market because it often correlates with increased demand for their products and services. When employment is high, companies may see higher sales and profits, which can lead to rising stock prices. Conversely, if job numbers are weak, it may signal trouble ahead for corporate earnings, which can cause stock prices to fall.
Inflation
Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of a currency. In other words, as inflation increases, each unit of currency buys fewer goods and services than it did previously. Inflation is typically measured by indices such as the Consumer Price Index (CPI) or the Producer Price Index (PPI).
In Australia, inflation data points towards the direction the RBA will take interest rates, as well as other central banks in other nations given a particular country’s own inflation data. Interest rates are a significant influencer of economic activity because they influence the cost of borrowing.
Beyond indicating what central banks will do, there are other things inflation points too as well. High inflation erodes consumer purchasing power, meaning people can buy less with the same amount of money. This can lead to a decrease in consumer spending, which is a major driver of economic growth and corporate profits. Lower consumer spending can hurt company revenues, leading to lower stock prices.
For businesses, inflation can increase the cost of raw materials, labor, and other inputs. If companies cannot pass these higher costs on to consumers through price increases, their profit margins may shrink, which can negatively affect stock prices. On the other hand, companies that can successfully pass on higher costs may maintain or even increase their profit margins, supporting stock prices.
Inflation can impact corporate earnings in different ways depending on the industry and company. For example, companies in sectors with high pricing power (such as consumer staples) may be able to pass on price increases to consumers, thus maintaining earnings. However, companies in industries with lower pricing power (such as retail or manufacturing) may struggle to pass on cost increases, leading to lower earnings and potentially lower stock prices.
Manufacturing data
This is most commonly the Purchasing Managers’ Index (PMI) or the Producer Price Index (PPI). PMI is an economic indicator derived from monthly surveys of private-sector companies, primarily in the manufacturing and services sectors. It is designed to provide a snapshot of the prevailing economic conditions and trends, helping investors, analysts, and policymakers gauge the health of an economy.
Meanwhile, the Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. It is an important indicator of inflation at the wholesale or producer level, as it tracks the prices that producers charge for goods and services before they reach the consumer market.
The PPI is often viewed as an early indicator of inflation because changes in producer prices can eventually pass through to consumer prices (measured by the Consumer Price Index, or CPI). The PPI is reported monthly and covers various industries, including manufacturing, agriculture, mining, and services.
What are the Best ASX Stocks to invest in right now?
Check our buy/sell tips
Blog Categories
Get Our Top 5 ASX Stocks for FY25
Recent Posts
Santos (ASX:STO): Is this the ASX’s best positioned oil and gas stock?
Santos (ASX:STO) looks to the best of the Big 3 ASX oil and gas stocks (the other 2 being Woodside…
Want to find good software stocks? Here are 4 important traits you need to look for
Software stocks have provided amongst the highest returns of any ASX sector. There have been plenty of success stories in…
Baby Bunting (ASX:BBN): FY25 will be better, but will investors give it the recognition?
Baby Bunting (ASX:BBN) is the poster child for what’s been happening retailers in a cost of living crisis…on steroids. This…