Interest Rate Forecasting: Economic Indicators
Interest rates on residential mortgages and U.S. Treasury securities can be influenced by monthly changes and the longer-term trend changes of economic indicators. There are many variables that can influence the rates on long-term debt instruments, but an understanding of key economic indicators can provide clues to the future direction of interest rates.
In most cases, economic reports are released on a monthly basis.
The Gross Domestic Product (GDP. The output of goods and services produced by labor and property located in the United States—is the most important economic indicator published.
A larger-than-expected quarterly increase or increasing trend is considered inflationary, causing concern that the Federal government might need to intervene and raise interest rates in order to slow growth. On the other hand, a negative growth or economic downturn may cause the Federal government to lower interest rates to stimulate the economy and increase the growth rate.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a fixed market basket of consumer goods and services. The CPI is considered the most important measure of inflation.
The CPI for All Items less Food and Energy (sometimes referred to as the "core" or "underlying" CPI) excludes volatile food and energy prices. Analysts focus on the "core" CPI, which is considered a more accurate measure of the underlying rate of inflation.
A higher-than-expected CPI or increasing trend is considered inflationary, and can cause bond prices to fall and yields and interest rates to rise. Likewise, a lower-than-expected CPI cause yields and interest rates to fall.
The Producer Price Index (PPI) is a family of indexes that measures the average change over time in the selling prices received by domestic producers of goods and services. PPI's measure price changes from the perspective of the seller. This contrasts with other measures, such as the Consumer Price Index (CPI), that measure price change from the purchaser's perspective. The PPI can be volatile. It is best to use the six-month to one-year moving average.
A higher-than-expected PPI is considered inflationary, and can cause bond prices to fall and yields and interest rates to rise. Likewise, a lower-than-expected figure cause yields and interest rates to fall.
Employment Situation: Payroll Employment. The government's employment report provides employment, hours and earnings estimates based on payroll records of business establishments. The payroll employment is the most significant indicator of current economic trends each month, together with the unemployment rate. Economists use payroll employment data to predict other economic indicators (the Personal Income, Industrial Production and Index of Leading Economic Indicators).
A higher-than-expected monthly increase or increasing trend is considered inflationary, and can cause bond prices to fall and yields and interest rates to rise. Conversely, a smaller-than-expected figure cause yields and interest rates to fall.
Employment Situation: Unemployment Rate. The government's employment report provides information on the unemployment rate and the number of unemployed persons by occupation, industry, duration of unemployment and reason for unemployment. Unlike the payroll employment data, which is a coincident indicator of economic activity (it changes direction at the same time as the economy), the unemployment rate is a lagging indicator.
A lower-than-expected unemployment rate or declining trend is considered inflationary, and can cause bond prices to fall and yields and interest rates to rise.
Consumer Credit Data tracks debt levels for auto financing and commercial banking credit and are considered a fairly good indicator of consumer spending. Consumer credit report is generally considered to have little impact on interest rates.
Housing Starts is one of the leading economic indicators. A higher-than-expected increase in housing starts triggers economic growth and is considered inflationary, causing bond prices to fall and yields and interest rates to rise. Likewise, decline or declining trend in housing activity slows the economy and can push it into a recession, causing yields and interest rates to fall.
