The Econoday calendar shows that roughly 45 indicators (give or take a few) are released each month. Our calendar highlights twelve market-moving indicators, for those investors short on time and inclination in reading about every nuance in the daily data. Also causing market gyrations are FOMC meetings, FOMC minutes and, not least, speeches by Fed governors. There is no question that some of the news is just noise and that some key indicators only cause market reactions on occasion. The key is to know which indicator will be important on which occasion.

The Economic Business Cycle
The National Bureau of Economic Research determines the business cycle's peaks and troughs. Just a few months ago, the NBER determined that March 2001 was the peak of the previous expansion. But the 1.4 percent GDP gain in the fourth quarter - leaving the U.S. economy with only one negative GDP quarter in 2001 - has stirred a little controversy whether a real recession ever happened. The old rule of thumb was that two negative quarters in real GDP constituted a recession. In reality, the NBER doesn't use GDP to determine whether the economy is slipping into or out of recession. Rather they look at a variety of monthly indicators, including employment, industrial production, income and business sales.

The economic business cycle is measured from peak to peak or from trough to trough, but has five distinct segments: peak, recession, trough, recovery and expansion (and new peak). Market players will monitor different economic indicators at different times of the business cycle. During economic expansions, market players are more worried about the potential for inflationary pressures. During economic recessions, they are concerned about rising unemployment and anemic consumer spending.

The Federal Reserve has twin goals of maintaining price stability and promoting economic growth. When you speak with a Fed official, he or she will tell you that the best way to promote economic growth is to maintain stable prices (a low inflation environment). The fact of the matter is that the Fed, as they did in 2001, will ease aggressively when economic activity is faltering. Yet they do tighten credit conditions when inflationary pressures are percolating or when the economy is expanding so rapidly that inflation is threatened.

During last year's recession, market players keyed on the consumer sector due to its large two-thirds share of GDP. Indicators such as consumer confidence and retail sales were closely watched. Consumer confidence and retail sales will remain key indicators as the recovery develops because the recovery's strength will still depend on consumers. But when the recovery turns into an expansion, inflation indicators will become more important.

Monitoring Indicators: trough to recovery
The employment situation is almost always going to be an important market-moving indicator. It reveals the state of the economy in general; it is released early in the month; it is rich with information and is the basis of many other indicators reported later in the month.

Consumer spending is a key element in the U.S. economy. Retail sales and consumer confidence are the two major indicators that will garner market attention. In addition, market players will also monitor personal income and outlays and motor vehicle sales. If consumers are willing to purchase such large ticket items as cars, they are feeling pretty good about their job security and their ability to make car payments.

Housing starts, new and existing home sales are also key indicators to monitor as the economy is coming out of recession because they reflect consumer sensitivity to interest rates. Typically, the Fed reduces interest rates during recessions. This spurs consumers to start investing in housing. As they purchase a new home, they also spend money on furniture and appliances (retail sales).

It is important for the manufacturing sector of the economy to come out of the recession as well. New orders for durable goods as well as the ISM manufacturing index are key indicators that reflect conditions in manufacturing. This helps market players predict the direction of industrial production.

Monitoring real GDP growth is important to market players, because it is a comprehensive measure of the economy. However, this report is quarterly, not monthly, making it less timely than other reports.

Business cycle: recovery to expansion
All of the reports that matter during the early stages of recovery continue to matter as the economy moves from recovery to expansion. But when does a recovery become an expansion? The recovery becomes an expansion when we have reached the previous peak and start growing past that level.

At this time, market players will start becoming concerned with the potential for inflationary pressures. Consequently, all inflation measures gain in importance.

The producer price index measures prices at the producer level for finished goods, intermediate goods and crude materials. The finished goods index gets most of the attention, but market players are beginning to follow the earlier stages of production to see if inflation is in the pipeline.

As its name implies, the consumer price index measures inflation for consumer goods and services. About 20 years ago, the index was equally divided between goods and services. The latest report shows that services account for about 58 percent of the index. This is important for investors. Even when prices of goods are declining (such things as oil, high tech equipment, durable goods such as cars and trucks), prices of services don't tend to drop, only slow their rate of increase. This puts a floor on the CPI.

Average hourly earnings are reported early in the month with the employment situation. While this is not the best measure of employment costs, it does reflect labor market conditions and wage pressures. Rapidly rising wages lead to either higher prices for goods and services, or smaller profit margins for producers.

The employment cost index is the most comprehensive measure of labor costs since it measures changes in wages and salaries, and benefits too. When this index is accelerating, market players worry that the Fed will tighten monetary policy.

Bottom Line
Market players are following economic reports closely to determine the extent of the recovery over the next few months. The equity market will view a robust recovery favorably because strong sales eventually lead to rising profit margins. Bond investors are less inclined to favor rapid growth since they fear inflation and rising interest rates with an expanding economy.

The inflation indicators will be taking a back seat to the economic growth indicators over the next few months as the recovery finds its legs. However, this doesn't mean that inflation will not be important since signs of growth coupled with even meager inflationary pressures would make the Fed more prone toward raising interest rates.

In the next few months, retail sales, consumer confidence, the ISM manufacturing index and industrial production may be the four most important indicators - following the employment situation of course.

Evelina M. Tainer, Chief Economist, Econoday