GDP, CPI, PMI and jobs data: the indicators that move markets

A handful of recurring economic reports shape how investors think about growth, inflation and interest rates. Gross domestic product (GDP), the Consumer Price Index (CPI), purchasing managers' indexes (PMIs) and the monthly employment report are the best known. Each measures a different part of the economy, arrives on a different schedule, and has its own quirks. Knowing what each one is, and what it is not, makes the headlines easier to put in context.

The main indicators at a glance

GDP

GDP measures the total value of final goods and services produced in the country over a period. The standard expenditure identity is:

GDP = Consumption + Investment + Government spending + (Exports - Imports)

Consumer spending is the largest component in the US. Growth is reported as an annualized rate, which restates a quarter's growth as if it continued for a full year.

Example (illustrative numbers). If the economy grows 0.5% in a quarter, the annualized rate is about 1.005 to the fourth power minus 1, which is roughly 2.0%.

GDP is a lagging, broad measure. An advance estimate is typically released about a month after the quarter ends, followed by revisions, and then further annual revisions later. A headline can change noticeably after the first release.

CPI and inflation

CPI measures the change in prices of a fixed basket of consumer goods and services. Headline CPI includes everything; core CPI excludes food and energy to reduce volatility. Reports show a monthly change and a year-over-year change, and the two can tell different stories, so check which one a headline is quoting. How inflation affects stock prices is covered in inflation and stocks.

The jobs report

The monthly Employment Situation report is typically released on the first Friday of the month, although the schedule varies. It combines two surveys. The establishment survey of employers produces nonfarm payrolls, the number of jobs added or lost, along with average hourly earnings. The household survey produces the unemployment rate. The two surveys can disagree in a given month, and prior months' payroll figures are frequently revised. The unemployment rate is a lagging indicator, while weekly jobless claims are a faster-moving signal of labor-market change.

PMIs

A PMI is a survey of purchasing managers asked whether conditions such as new orders, production and employment are better, the same or worse than the previous month. The result is a diffusion index, and 50 is the dividing line: above 50 indicates that more respondents report expansion than contraction, below 50 the reverse. A PMI is a survey of direction, not a measure of the size of growth, and it is available early in the following month, so it is often treated as a leading indicator.

Leading, coincident and lagging

Economists commonly sort indicators by timing:

• Leading: PMI new orders, jobless claims, building permits, the yield curve
• Coincident: payrolls, industrial production, retail sales
• Lagging: the unemployment rate, GDP in the sense that it reports the past

The labels are a guide to usefulness, not a guarantee, and some indicators fit more than one category.

How markets react

Markets trade on expectations. Before each release, economists publish a consensus forecast, and the price reaction depends on the surprise relative to that forecast, not on the number alone. A strong jobs report might be read as good news for earnings, or as bad news if it raises the odds that the Federal Reserve keeps rates higher. Which reading wins depends on the backdrop. This is the logic behind interest rates and the Fed: data matter largely because they change rate expectations. The same data also feed recession worries, discussed in the yield curve and recession signals.

Common mistakes

• Reading one release in isolation. Trends across several months are more informative than a single print.
• Ignoring revisions. First estimates of GDP and payrolls are later adjusted, sometimes substantially.
• Mixing monthly and annual changes. Month-over-month and year-over-year figures answer different questions.
• Treating the 50 line as a growth rate. A PMI of 52 does not mean 2% growth.
• Assuming good data means rising stocks. Prices respond to surprises and to what the data imply for rates.
• Equating two quarters of falling GDP with a recession. That is a rule of thumb, while the official call belongs to the NBER.

Where to see it on StocksXray

The Market Compass takes a market-based approach to growth and inflation, using proxies derived from market prices rather than waiting for official releases, which arrive with delays and are revised. Its hints describe past tendencies, not forecasts. The idea is explained in economic regimes and the Market Compass.

Key takeaways

• GDP measures output quarterly, CPI measures consumer prices monthly, the jobs report measures employment, and PMIs are fast survey readings with 50 as the neutral line.
• Official figures are published with a lag and are revised, so early readings are provisional.
• Markets react to the gap between data and expectations, not to the data alone.
• Combine several indicators and look at trends rather than single releases.