Econ Category #1: income, spending, & output

 

“Changing ourselves is a much more reasonable undertaking than trying to change other people.” 

– Thomas Sowell

 

Howdy, gang!  Well, it looks like any of the excess quantities of Dramamine have already been purchased by market participants after last week’s wild ride!  Large market moves are a poignant reminder of how important it is to have personal trading rules.  One of the more responsible rules that a trader can have revolves around risk and how much capital we allow to be used as “risk capital” in any one day.  I know from personal experience that it can be hard to adhere to such rules especially when everything seems so rosy, but as we learned (and will continue to learn throughout our entire lives as market participants) things can change quickly!  It’s also not a bad idea to get into the practice of placing types of “hedge trades” that are beneficial in different market environments.  Perhaps the best thing about big market changes is that it gives us experience and makes us more prepared. 

In the previous installment of Know Good Things, I essentially set the stage for an extended discussion focused directly on the various reports we have access to.  I decided to undertake the challenge of labeling several reports for the benefit of you, the individual.  In my mind, it only made sense to label these reports as belonging to one of seven major categories then break those individual reports down into what type they are as well as which classification they belong.  I listed the seven broad categories last week and we’ll take a look at the first one today.

The first economic category that I listed is: INCOME AND SPENDING. 

The reports belonging to this class include some pretty heavy hitters!  Gross Domestic Product, for example, is a perfect fit for this group because it involves both income and spending (as well as overall output, a major factor considered for this category).  GDP is such a big report (literally) that it’s issued every month, but only really becomes official on a quarterly basis.  The intermittent reports are essentially designed to “update” any miscalculations or unforeseen additions/subtractions that weren’t officially finalized during the previous month.  As you can imagine, it can be a rather daunting task to tabulate all of the business output from our nation’s business dealings from the previous three months!  I don’t fault our federal analysts too much for needing to reevaluate what may seem like an unending waterfall of raw data, but I will admit that it has felt deliberate (at times) in the past.  It always interests me to see the sudden change in certain economic reports just prior to or immediately following a major national election.  We saw this happen several times over the past decade and it’s hard not to get a bit angry at the lack of transparency.  It is what it is, I suppose…but it doesn’t need to happen.  There just isn’t enough of the populace who really understand or follow this type of information for anyone in the government to feel the heat.

Here is a list of other reports that should be considered for this pretty important economic category:

– (Nominal) Gross Domestic Product (GDP) [quarterly]

– Real GDP [quarterly]

– Business Output [quarterly]

– National Income [quarterly]

– Consumption Expenditure [quarterly]

– Corporate Profits [quarterly]

– Real Gross Private Domestic Investment [quarterly]

★ It should be noted that the difference between GDP and Real GDP is inflation.

Nominal GDP is essentially what we pay attention to the most and is cited by newspapers and television broadcasts the most. It’s the raw data depicting the overall output of our economy. Real GDP, however, is the same measurement of our nation’s overall economic output, but it happens to be adjusted for price fluctuations (inflation). Personally, I like the Real GDP numbers because it’s a heck of a lot more accurate, but it doesn’t usually get the headlines. If it’s not in the headlines then it’s not likely going to move the markets so we should definitely stay up-to-date with the nominal GDP figures that are announced instead of placing much emphasis on Read GDP numbers. Besides, we do have access to an actual inflationary report that is separate from GDP so it’s not like they can hide this type of information. They can lie about it or misrepresent the truth, but they can’t hide it.

For the most part, the kinds of reports that I listed for this category are broad.  There are more specific reports that you’ll notice on your economic calendar, but if you think about them for a minute or spend just a few minutes researching the definition/description then you should be able to determine if they fall into this category.

It should be noted that every report that falls under this category acts as PROCYCLIC report with a COINCIDENT directional classification (if you don’t know what these mean, you can read my other post HERE and HERE).  One could argue that there’s a little bit of a “leading indicator status” associated with this category, too.  I’m not personally willing to affix a “leading indicator” label to these reports because there are just too many variables that change from month to month and there’s way too much emotion attached to these reports, too!  Regardless, these are some pretty big economic reports that get thrown into the news headlines on a regular basis for us to ignore them.  It’s wise to have a familiarity with our nation’s business output because it seems to be a direct line to the emotional state of the people who are leading these businesses.

Take a moment to familiarize yourself with this category for the week and be ready to move on to the next one.  I wish you all nothing but the best and hope you have an exemplary week!  Until next time!

Be good.  Do good.  Know good.

Kleiny (@KnowGoodThings)

Columbus, Indiana