Customer Reviews

The Trader's Guide to Key Economic Indicators

5 star:		(4)
4 star:		(2)
3 star:		(4)
2 star:		(0)
1 star:		(0)

 

 

This book contains lots of factual information and useful overviews as to what the key economic indicators are, how they are constructed, what their purpose is, and how they work. With that said, it felt more like a pocketbook of facts and figures, similar to the ones published by The Economist, than an actual "guide" for traders.

In the introduction, the book is offered as a useful source for anyone new to these indicators, but Yamarone never really mentions one of the most important aspects of trading: how to prioritize information flow.

The drawback of fundamental trading is the susceptibility to "analysis paralysis," i.e. the danger of information overload causing you to freeze like a deer in the headlights. On the other side of the coin, traders who try to digest a mountain of information without prioritizing it are more likely to make their decisions based on a handful of dominating factors, or even hunches, and then simply use the additional supportive data they find to justify those decisions. Studies of decision-making habits conducted on CIA intelligence analysts show that, when there is a surplus of information, it's a natural tendency to use only a small portion of the information available, while incorrectly assuming that all of it is being utilized.

Yamarone does not mention these pitfalls, nor does he cover the reality of theme trading and indicator fashion. Indicators and market relationships go in and out of style, much like short skirts or thigh high boots on the catwalks of Paris and Milan. Traders will collectively switch their focus from one relationship to another, one data set to another, and so on; the trade deficit means nothing for a while, then suddenly it means everything. The Employment Situation is critical for a time, then later inconsequential as long term yields come to the fore. It's all about context, and that isn't addressed at all.

In writing for a large audience, Yamarone also made sure to keep his opinions bland and uncontroversial. I found this a little disappointing in terms of what was left out. For example, consider this tidbit from the chapter on New Residential Construction:

"Before the 2001 recession, housing starts were the most reliable and accurate measure of U.S. economic health... the 2001 recession broke this pattern. Housing starts remained strong during the downturn because historically low inflation kept mortgage rates low..."

For a student of economic history--or a trader wishing to profit from macroeconomic movements--this is highly provocative subject matter. Questions come tumbling forth: Has a longstanding relationship been declared invalid by the 2001 pattern, or was it a case of unprecedented doubling down via credit stimulus? Were mortgage rates low simply because inflation was low, or more because the fed was hell-bent on pumping easy money into the economy to avoid a reckoning? Is it historically a good thing to try and avoid all painful recessions, or are painful recessions occasionally necessary, as a cleansing process after a period of extreme speculative excess, with bad-to-worse consequences for putting them off? Is there greater risk when a paper asset bubble transitions into a real estate valuation bubble?

Yamarone sails past all of this, like an amateur checkers player doing commentary for a chess tournament. My guess is that he is well aware of these subtexts, but his overriding goal was to avoid fistfights and not offend anyone. When conflict avoidance is a key factor, milktoast commentary is often the lukewarm result!

In my reviews I occasionally suggest alternate titles that better reflect a book's contents. I would call this one "the MBA grad's guide to economic indicators," or maybe "the junior analyst's guide to economic indicators." If it were truly aimed at traders, it would (or should) have more to say about prioritizing information flow, gaming expectations, and paying attention to context, context, context.

As it stands, Yamarone has put together a decent reference source to grab off the shelf when a wallflower data set becomes the latest belle of the Wall Street ball. By that measure, it's a worthwhile purchase.

Even if you once knew all the ways that economic indicators are defined, data collected and reported, chances are that all of this has changed (unless your knowledge is less than 2 years old). In addition, the best way to use these indicators is constantly changing as new analytical tests are developed and back-checked. So if you are the chief economist for a Wall Street investment bank or brokerage firm, you probably don't need this book. But if you hold stock and bonds in the United States less often than 10 years, you can profit from this book.

Each chapter provides a delightful history of how a relevant indicator was developed, how the measurements are made now, how to apply the indicator for stock and bond investing and the latest technique for getting an "edge" on just looking at the indicator alone. The material is written in the kind of simple language that almost anyone can easily understand. The math is simple, too. If you can do arithmetic, you can understand this book.

There are individual chapters GDP; leading, lagging and coincident indicators; employment; industrial production and capacity utilization; indices from the Institute for Supply Management; manufacturers' shipments, inventories and orders; manufacturing, trade inventories and sales; new residential construction; consumer confidence and sentiment; advance monthly sale for retail trade and food services; personal income and outlays; and the consumer and producer price indices. Each discussion looks at how these data help you understand the future business cycle, interest rates, corporate profits and Federal Reserve actions.

I thought that the graphs were one of the best parts of the book. You can judge for yourself how powerful the relationships are that Mr. Yamarone outlines.

As I finished this book, I realized how nice it would be to have similar books for consumer decisions (like when to refinance your home, etc.) using the same kind of indicators in different ways.

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I teach MBA students at NYU and have read pretty much everything that's out there on macroeconomic indicators. The Economist Guide has its usual lively style, but gives you a weird mix of data and theory (bad theory, in my view). This book is better, written pretty well and focused on how you'd use various indicators. Almost as good and much shorter is the Econoday guide, most easily found via Bloomberg's Economic Calendar (go to Bloomberg, look for the calendar under Market Data). I also liked the JP Morgan Global Data Watch Handbook, but they seem to have retired it.

Right now the best of the lot is Bernard Baumohl's book, The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities, 2nd Edition. It gives you a clear and precise description of the most important economic indicators (what they are, how they're used). Also covers countries outside the US, which is a must for my students.

For the reviewer who complained about access to data, the best source to public data is FRED: [...]

This book was surprisingly easy to read and understand. Very interesting material for anyone curious about the factors that influence the economy and what measures to watch to understand where we are heading. Concentrates on the major indicators and tells you where the data comes from. Illustrated with lots of charts and tables to help you understand the relationships over time. Organized so that the information builds up to the more complex relationships. Though written by an economist, this book is surprisingly easy to read and the material was interesting (even for someone that slept through econ 101, like me). The most useful economics book I have run across. Highly recommended.

This is a quality book without question. However, it provides too much factual descriptions about all the indices rather than important, key insights. I often had a hard time finishing every chapter completely. It often proves difficult (if not impossible) to get a hold of the data mentioned in the book without subscribing to a professional service like Bloomberg. 20% of this book gives 80% of the insight : I'd rather had seen the author explore that 20% in depth.

I found this book to be very readable and balanced from start to finish. Sure, some of the material became a little dry, but each chapter was readable in a single sitting. The excellent consistency between chapters with respect to the writing style and use of charts made the book well worth the time to read. The author has done a great job in pointing out what matters for each index he described. I wish all books on finances could be written with such clarity. This book is ideal for anyone who wants to learn more about spotting trends in the economy by learning the significance of the dozen economic indicators the author presents.

Dips or rises in the stock market are often attributed to the reaction of traders to economic indicators. The Traders Guide to Key Economic Indicators by Richard Yamarone explains these indicators; what they can say about the economy, and how they can impact the financial markets. While economic theory and terminology can get complicated, the individual investor can apply it practically in order to time the purchase or sale of investments.

The cover quotes a senior correspondent from CNN describing the book as an easy to understand guidebook for investors. While the term is relative, it means that any reasonably intelligent person can understand the book. The target audience is newly minted traders and serious investors, so a would-be reader ought to have some background in economics. Keeping up with the latest financial news is probably a good pre-requisite in that regard. The cover price of $39.95 is along the lines of a college textbook. This primer on economic indicators does not come cheap, unless you can borrow the book from your local library.

From college economics class, you'll recall that the output of a country is its consumption, investment, and government spending, as well as net exports, that is:
Q = C + I + G + X - M

GDP, or capital Q in the formula, is the measure of our economy. Its rate of growth climbs during boom periods, and falls during recessions. If the economy produces a lot of goods during a particular quarter, corporate profits should soar, and so should the dividends that these companies declare. Naturally, the stock market relishes news of a strong GDP. Bond traders fear that rising GDP might portend an overheated economy and rising prices for consumers. Any whiff of inflation drives the bond market into a selling frenzy.

Economic indicators are about measuring GDP - because you can't predict where you're going to be if you don't know where you are - and predicting GDP. Indicators are, therefore, classified into three categories: lagging indicators verify past trends, coincident indicators measure current output, and leading indicators help economists anticipate future GDP. The first two chapters of this book describe GDP and the indices, while the next chapters break down ten specific releases that are important for the reader to know.

They aren't always intuitive. For instance, the Employment Situation Report from the Bureau of Labor Statistics produces a figure on the `Number of Nonfarm Employees on Payroll.' Most textbooks call this a coincident indicator, but here it is classified as a leading indicator. It is more accurate to say that the statistic is a proxy for GDP. Since GDP is released quarterly, many use the Employees on Payroll statistic for the other two months in the quarter, because it is released monthly.

The `Number of Average Hours Worked' on the Employment Situation report is a leading indicator of economic growth, since the fruits of their labor will result in GDP. `Average Weekly Claims for Unemployment' is a slightly lagging indicator, as its apex is reached after the trough of an economic downturn. Duration of unemployment is also a lagging indicator, because the longer people are out of work, the more their frustration grows.

It is difficult to keep these statistics straight, as a statistic about employment can be lagging, leading, or coincident. A book like this can help keep the differences straight, which is often the toughest part about figuring out what these statistics mean.

The Nightly Business Report covers most of the important statistics on its calendar of events, and they usually have a comment about a key statistic, particularly after a day where they move the markets. Financial sections in most newspapers also cover these statistics. They're fairly important for figuring out daily market reactions, which can help in making a decision to buy or sell.

The information imparted by this book is specialized but useful. It's not the first book to recommend for investors, but it is a useful primer on some detailed tricks of the trade. Brokers should find the book useful, as it will enable you to converse more intelligently with your clients about news from the trenches. These indicators, after all, are tested on the Series 7 exam.

I wanted a book in this area to augment my Technical Analysis learnings....This book nails it...It would have recievd a 5 start (instead of 4 star) if it had a glossary - and a table sumurizing all the 14 or so indicators, when they are released, main uses, etc.
-Joe

Good book as an intro into economic indicators. I enjoyed reading about how and why they were developed.

The book answers every question a trader/investor would have regarding the various key economic reports that move the markets. Very detailed and informative.

-JL
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