Economic data & share prices
Economic data reflect the health of the overall economy and provide a snapshot of the business conditions that companies have been living with.
They are also used by the government to shape future economic policy, so can trigger expectations of government action such as interest rate or tax changes, which in turn will affect the business environment.
The release of important economic data is therefore greatly anticipated by shares traders, who use the numbers to predict if stock prices will rise or fall.
Because there are so many traders waiting to see what the latest release could mean for the economy, stock trading volumes on big data release days can be huge and share prices are often very volatile.
It is important to remember that economic data nearly always reflects the past rather than the present. There is a time lag between a statistics agency measuring data and releasing it and how 'up-to-date' a figure is can determine how big an impact it has on share prices.
Gross domestic product (GDP) measures the market value of all finished goods and services produced in a country.
It is taken as a gauge of the overall health of an economy and helps investors determine whether an economy is growing or shrinking.
Positive GDP figures will therefore usually help lift share prices as most companies perform better when an economy is expanding and more investors will want to own their stock.
The unemployment rate measures the percentage of the labour force that is out of work and actively seeking employment.
Low unemployment figures suggest that more consumers have disposable income to buy companies' goods and services. This tends to support companies' earnings and therefore their share prices.
Low unemployment also gives investors more confidence in the economy overall, which can increase their appetite for risk and their willingness to buy shares. This extra demand can also push up share prices in general.
The US non-farm payroll report – released on the first Friday of each month – measures the number of jobs that have been added or lost in the US.
Because employment figures reflect economic health and the US is the world's biggest economy, investors view the US non-farm payroll as a gauge of global economic prospects.
A good or bad non-farm payroll figure can therefore affect the share price of companies that do not even operate in the US.
Retail sales measure how much money consumers have spent in stores, catalogues and online over the previous month.
Figures are broken down into sectors, detailing for example how much has been spent on clothing or food.
Retail sales will obviously impact the share price of retailers, as they reflect how well the industry is performing.
Because demand for specific goods is detailed in the figures, investors can also use them to decide whether to invest in the shares of, for example, a supermarket chain instead of a fashion retailer.
Retail sales also reflect the wider economy as they show how much consumers are spending and how confident they are about their own economic prospects.
Retail sales also make up a large portion of GDP, so a string of big sales falls can be an early indicator of a recession.
Housing and construction
The housing and construction industry is considered a key element of any economy.
A range of figures, such as new building starts, construction costs and house prices, are released each month to reflect the health of the industry.
Figures pointing to high activity in construction will obviously support the share prices of construction companies and home builders as they win more business.
A busy construction industry can also support the wider economy – and therefore share prices in other sectors – as jobs are created and demand rises for the raw materials used in construction.
House prices and home sales data are also closely watched, especially in the UK. Higher house prices make home owners feel wealthier and this can increase their spending on the goods and services that companies provide. This can therefore boost share prices.
In this lesson you have learned …
- … economic data reflects the health of the overall economy and provides a snapshot of the trading conditions that companies have been living with.
- … it is used by the government to shape future economic policy, so can trigger expectations of government action such as interest rate or tax change, which will in turn affect the business environment.
- … economic data reflect the past rather than the present and there is a time lag between a statistics agency measuring the data and releasing it.
- … GDP is taken as a gauge of the overall health of an economy and helps investors determine whether an economy is growing or shrinking.
- … positive GDP figures can lift share prices as most companies perform better when an economy is expanding.
- … low unemployment figures suggest that more consumers have disposable income to buy companies’ goods and services and this supports companies' earnings and share prices.
- … retail sales figures impact the share price of retailers, as they reflect how well the industry is performing.
- … because the figures are broken down to show demand for specific goods, investors can use them to decide whether to invest in the shares of, for example, a supermarket chain or a fashion retailer.
- … figures pointing to high activity in construction support the share prices of construction companies and home builders as they win more business.
- … a busy construction sector can also support the wider economy – and therefore share prices in other sectors – as jobs are created and demand rises for the raw materials used in construction.
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