General Overview of the US Economy

General Overview of the US Economy

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General Overview of the US Economy

The United States enjoys one of the most developed economies. Its GDP (Gross Domestic Product) for year 2006 is over $13 trillion. This is the highest GDP in the world, surpassing countries like Japan, Germany and UK.

Investors have concentrated their assets in the US since it enjoys the world’s most developed and liquid equity and fixed income markets.

Since the foreign direct investment represents a big percentage of global net inflows to the US, if investors decide to withdraw their assets, it will have a significant impact on the values of the US assets and the USD respectively.

The US also enjoys a high import and export volume. One of the factors that greatly contributes to this is the size of the country itself.

However, the US suffers a trade deficit, because it is importing more goods and services than it is exporting. Additionally, the US is dependent on capital flows, which results in the dollar’s sensitivity to any change in these capital flows.

Thus, in order to avoid a decrease of the USD, the US needs to attract more than 1 trillion of capital inflows every day.

Another characteristic of the US economy is its status as the largest trade partner of many countries. It trades largely with Mexico, Canada, Japan and many others.

The US economy is generally described as being oriented toward the service sector. The introduction and development of different technologies and the Internet have led to the consistent increase in the productivity of the US. Despite the relative downturn that the economy is currently experiencing, the productivity has not been influenced, which leads to many experts claiming that the economy is entering a new stage.

The central bank of the United States is the Federal Reserve Board, commonly referred to as only the Fed. Their major responsibility is the setting, implementing and monitoring of different monetary policies.

A part of the Fed is the Federal Open Market Committee (FOMC), which includes 12 members.\

Within the FOMC, seven Governors of the Federal Reserve Board and five presidents of the twelve district reserve banks hold voting rights on important issues.

Each year approximately 8 meetings are held for the purpose of establishing interest rates. The decisions made at these meetings are closely watched since they may have a significant impact on the forex market.

The Fed is characterized as being relatively neutral and independent of political influence. It enjoys high autonomy regarding the monetary policy setting. Two times per year (in February and July) it issues the Monetary Policy Report. This report is followed by the Humphrey-Hawkins testimony.

The latter includes answers to questions of the Congress and the Banking Committees given by the chairman of the Fed. Data you can find in the report includes information on inflation, unemployment, and expected GDP growth.

The basic goals of the Fed include:

  • Price stability
  • Sustainable economic growth

The achievement of these long term goals is done through the application of different monetary policies in order to set unemployment and inflation into reasonable limits and enhance economic growth.

In order to achieve these, the Fed tends to execute open market operations, such as the buying of government securities. This is done in order to decrease interest rates.

On the other hand, the selling of government securities leads to increase in interest rates. Whichever strategy is applied depends on the economic conditions the Fed wants to counteract.

Another way to influence market conditions is through the control of fed funds. These are the resources the Fed has available for borrowing to member banks.

When inflation rates rise, the Fed will increase this rate. On the other hand, if the Fed wants to encourage growth, it will decrease this rate.

US Economic Indicators Important for Forex Trading

There are several important economic indicators concerning the US you should pay special attention to. They are as follows:

Employment Report

This report represents one of the most closely watched documents, which importance stems mainly from political reasons rather than economic ones. It shows the increased efforts of the Fed concerning counteraction of unemployment.

Since interest rates are the main tool that the Fed uses, employment conditions reflect on interest rates.

The employment report is based on data from:

  • The Establishment Survey – data that is studied in this survey typically comes from the aggregate hours index, non-farm payroll employment and the average hourly workweek.
  • The Household Survey – this survey includes analysis of such information as unemployment rate, labor force and household employment.

Seasonally adjusted monthly unemployment rates and changes in non-farm payrolls are in the focus of traders that operate on the forex.

Gross Domestic Product (GDP)

This indicator measures the total amount of goods and services that have been produced and consumed within the US borders. Advance reports on the GDP are issued at the end of each quarter.

Additionally, two complementary measures have been developed – the one based on income, whereas the second is based on expenditures.

The advanced releases of the GDP are in the focus of attention since they include information on inventories and trade balance.

Consumer Price Index (CPI)

Inflation levels are typically measured by the Consumer Price Index (CPI), which is based on a basket of consumer goods and services. The importance of this index to forex traders stems from the fact that it represents an important factor of many activities.

Producer Price Index (PPI)

An index that measures the average changes in selling prices that local producers receive for their production is the producer price index (PPI). It includes change in selling prices of products from such industries as mining, manufacturing, agriculture and etc.

Changes in the index are observed every hour, month, quarter and year. Traders on the forex market focus on seasonally adjusted finished goods PPI.

Employment Cost Index (ECI)

This index is based on data on employer payrolls and information coming from:

  • 3,600 private industry employers
  • 700 state and local governments
  • Public hospitals
  • Public schools

The ECI is preferred by the Fed for several reasons, the major one being its inclusion of non-wage costs.

ISM Survey

This survey is usually analyzed in order to make predictions on the expected growth in the manufacturing sector. It is issued by the Institute for Supply Management every month and includes information extracted from a sample of 300 purchasing managers from around the country.

If the index has a value greater than 50, then the economy is regarded as growing. On the other hand, if the index is less than 50, then the economy is contracting.

Consumer Confidence Survey

In order to get a view on the confidence households have in the economy you should refer to the consumer confidence survey. This survey includes the responses on 5,000 households. It includes questions on:

  • employment opportunities in the area of residence, as well as their availability over the past six months,
  • business conditions prevalent in the area, as well as an evaluation of the business conditions for the past six months,
  • income of the household for the past six months.

Data is extracted from the received responses and is seasonally adjusted. After this an index is established. If the consumer confidence is high, then this is an indication of increases in the spending of consumers. However, this may lead to higher inflation rates.

Retail Sales Index

This index presents information on the total amount of goods that have been sold. Data is received from retail stores for one month time period. The basic application of the retail sales index concerns the measurement of consumer confidence and the resulting consumption.

International Trade Balance

The difference between exports and imports of goods and services executed through foreign transactions is referred to the balance of trade.

Detailed information on the executed trade transactions, as well as the foreign trade partners can be found. Trading on the forex market includes the focus on the seasonally adjusted numbers of trades, which usually span to a three-month time period.

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