Trading Economics

A Guide to Economic Statistics for Practitioners and Students

Trevor Williams, Victoria Turton

• Publisher: Wiley
• Year: 2014
• ISBN:
  9781118766385
• Edition: 1
• Topic: Commerce
• Subtopic: Finance

A practical guide to understanding how key economic and market statistics drive financial market trends

The recent global financial crisis stressed the need for economists who understand how key economic and market statistics drive financial market trends and how to mitigate the risks for businesses that those trends affect. Trading Economics provides guidance for navigating key market figures in a convenient and practical format. Emphasizing the link between economic data and market movements, this book analyzes surveys, economic growth statistics, inflation, labor markets, international trade, monetary and fiscal indicators, and their relevance in financial markets. It bypasses complex terminology to offer a hands-on, accessible introduction to financial statistics and how to profit from them.

• Offers clear illustrations and an easy-to-read layout to teach you how to trade profitably in financial markets and minimizes risk for your business
• Written Trevor Williams and Victoria Turton, authoritative public figures with experience working on the New York Stock Exchange
• Includes a website featuring a blog and new surveys as they develop accompanies the book

Complete with worked examples and updated information, Trading Economics is an essential, comprehensive guide to understanding every aspect of financial market trends and how to navigate them to your advantage.

1
Surveys

…our decisions to do something positive …can only be taken as a result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

John Maynard Keynes¹

What Keynes encapsulates in his phrase ‘animal spirits’ is the essence of motivation driving human action. Although a basic tenet of neo-classical economic theory is that human beings are rational and that they evaluate options in a logical and self-interested manner, studies of behavioural economics have since emerged to demonstrate that, in fact, human beings can be very irrational for a very long time under certain circumstances.² We can be perverse.

Surveys help to capture the idiosyncrasies of our behavioural traits that lead to outcomes you would not necessarily expect under ‘normal’ circumstances. They provide us with a timely snapshot of sentiment and opinion, and the perception is that this sentiment and opinion lead to real world events. They are related to the concept that the ‘animal spirits’ of humans drive financial markets.

Let us take an example: human beings often behave essentially like herd animals. This can be likened to the so-called ‘network effect’, where you moderate your actions and responses according to those of your neighbour or someone whom you respect, admire and listen to (i.e. act as they act and, to a certain extent, do as they do). This, then, has an influence on actions that lead to real outcomes. In other words, the actions of people can be linked to human instinct and so have an impact. If we believe that something is going to happen, it makes it more likely to happen. It's the classic self-fulfilling prophecy, or ‘placebo’ effect. There is even evidence that the latter has ‘real’ effects.

However, it is important to remember that surveys don't measure activity directly; theirs is an indirect role. They may, of course, have a link to an activity, but they are not as representative as the activity itself. That means they are not as powerful in measuring actions and outcomes as actual activity indices. Instead, what they are most useful for is alerting us to how activities are likely to change.

A study carried out by the Bank of England demonstrated this.³ It stated that, although surveys are very important, they are actually not important in or of themselves. Surveys don't move markets – it is what they may say about a forthcoming economic indicator that does that. They can tell us about sentiment surrounding forthcoming indicators, but, in themselves, they don't embody the impact. Ultimately, therefore, it is the indicators they are trying to predict that have the real effect.

Having said that, surveys still have a valuable role in understanding and interpreting economic data. By capturing perceptions, they have an intrinsic value and they achieve this across a variety of agents that operate in an economy: consumers, households and businesses. They can also be complementary, giving a sense of the direction of travel of data or of their turning points.

SURVEYS AND BEHAVIOURAL ECONOMICS

Where surveys are particularly important is in the role they play in the growing area of behavioural economics. Here, for example, the limitations of traditional ‘logical’ or ‘rational’ economics are tested and the so-called ‘bounded rationality’ concept of human behaviour emerges.

This school of thought shows that there are anomalies in the traditional account of human need for goods and services to satisfy their demand. These anomalies take the form of:

• Adhering to social norms
• The importance of maintaining self-image
• The availability or desirability of goods
• Altruism
• Making us happy.

What this means is that, according to neo-classical general economic theory, if the price of a particular good increases, demand for that good falls. Where the anomalies come into play, of course, is when, despite the price of a particular good increasing, humans will still purchase it, because it is important to their self-image, because there is pressure from someone else within their social group (i.e. the children demand it) or simply because it makes them ‘happy’ or feel good. There will at some point be a time when the price rise may become wholly prohibitive, but until that time is reached, demand for that good will be maintained.

These may appear, at first glance, rather trivial observations, but these are the motivations that drive human behaviour and that are the essence of economic activity.

TYPES OF SURVEY

There is a plethora of surveys available:

• Consumer surveys – demonstrating what people are intending to spend money on, decisions about where to shop and when.
• Household surveys – showing employment prospects, inflation or interest rate fears.
• Business surveys – indicating investment or spending intentions, decisions that drive output or employment, supply side information.
• Market surveys – focusing on market sentiment that can be broken down across industry or sector.
• Government surveys – which look at the intentions of government and the impact of their activity.

In this chapter, we will focus on those surveys considered to drive markets and to have a discernible economic impact across business and consumers. We will look at what these surveys tell us and what they don't tell us, how they can be interpreted and how you can extract value from them to support your trading decisions.

BUSINESS SURVEYS

Purchasing Managers' Index (PMI)

This is a monthly economic indicator based on surveys of private companies in sectors such...

Table of contents

• Cover
• Series
• Titlepage
• Copyright
• Acknowledgements
• Introduction
• 1 Surveys
• 2 Economic Growth
• 3 Labour Markets
• 4 Inflation
• 5 Monetary Statistics
• 6 Fiscal Indicators
• 7 Global Trade Statistics
• Conclusion
• Appendices
• Index
• End User License Agreement