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Economic Glossary:
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- Asset:
- Anything owned of monetary value
including real property, personal property, and
enforceable claims against others (including bank
accounts, stocks, mutual funds, etc.).
- Balance Sheet:
- A financial statement that shows
assets, liabilities, and net worth as of a specific date.
- Before-tax Income:
- Income before taxes are deducted.
- Business Inventories And
Sales:
- These figures measure the
inventories and sales of manufacturing, wholesalers, and
retail establishments. These figures are released monthly
by the Bureau of Census. In most cases, an increase in
these numbers indicates an expanding economy which could
be inflationary. Bond Market Moves Down In Price.
- Capacity Utilization:
- The capacity utilization rate
measures the percent of industrial output currently in
use. A change in the rate indicates a change in the
direction of economic activity. As the percentage rate
moves closer to 90% the industrial output is practically
at full capacity and is inflationary. A number closer to
70% is recessionary. A higher percentage indicates a
stronger manufacturing sector and an expanding economy
which can be inflationary. Bond Market Moves Down in
Price.
- Compound Interest:
- Interest paid on the original
principal balance and on the accrued and unpaid interest.
- Consumer Price Index
(CPI):
- The consumer price index is an
indicator of the general level of prices. Components
include energy, food and beverages, housing, apparel,
transportation, medical care, and entertainment. When the
consumer price index goes up, it is a sign of an
inflationary environment. Consumers have to pay more for
the same amount of goods and services. Bond Market Moves
Down In Price.
- Deposit:
- This is a sum of money given to
bind the sale of real estate, or a sum of money given to
ensure payment or an advance of funds in the processing of
a loan.
- Durable Goods Orders:
- This gives a reading on the
country's future manufacturing activity. Durable goods
include those manufactured items with a normal life
expectancy of three years or longer. An increase in the
amount of durable goods orders may indicate an expansion
in the economy and, if inflationary, the Federal Reserve
could choose to tighten money by raising interest rates.
Bond Market Moves Down In Price.
- Effective Gross Income:
- A borrowers normal annual income,
including overtime that is regular or guaranteed.Salary is
usually the principal source, but other income may qualify
if it is significant and stable.
- Effect Of Economic
Indicators On Fixed Income Investments:
- Market participants look to U.S.
Government economic releases as an indication of the
economy's strength and general direction. Overall,
economic indicators reflect the rate of economic growth
and inflation which, in turn, affects interest rates.
There is an inverse relationship between interest rates
and bond prices. If the economic indicators indicate that
the rate of inflation is on the rise, it will most likely
result in higher interest rates and lower bond prices.
Conversely, if these indicators indicate the rate of
inflation is falling this will result in lower interest
rates and higher bond prices. The following glossary
defines what these indicators are and how they might
affect the bond market.
- Factory Orders:
- Manufacturer's shipments,
inventories, and orders. Factory orders include shipments,
inventories, and new and unfilled orders. An increase in
the factory order total may indicate an expansion in the
economy and could be an inflationary factor. Bond Market
Moves Down In Price.
- FED Is Easing:
- Exactly the opposite of Fed
tightening. The Federal Reserve feels that the economy is
not growing at the desired level and eases credit
conditions by lowering interest rates to help stimulate
the economy. Bond Market Moves Up In Price.
- FED Is Tightening:
- This term refers to efforts by the
Federal Reserve to curb excessive growth in the money
supply. This can be accomplished by raising the discount
rate and/or increasing the federal funds rate. Bond Market
Moves Down In Price.
- Gross National Product
(GNP):
- The Gross National Product is the
broadest measure of the nation's production. It measures
the market value of all newly produced goods and services
in the United States. When GNP is down, it shows a slowing
down in the economy. To counteract this, the Federal
Reserve may loosen money by lowering interest rates. Bond
Market Moves Up In Price.
- Industrial Production
Index:
- The industrial production index
measures the monthly level of the physical output of the
manufacturing, mining, and gas and electric utility
industries. When industrial production is down, it
indicates a slowing of economic growth and, therefore, the
Federal Reserve is inclined to allow interest rates to
drop to stimulate the economy. Bond Market Moves Up In
Price.
- Leading Economic
Indicators:
- This index is a composite of 11
statistics designed to foretell economic activity 6 to 9
months hence, (i.e. building permits, new orders for
consumer goods and materials, the average workweek, index
of consumer expectations).
- Line of Credit:
- An agreement by a commercial bank
or other financial institution to extend credit up to a
certain amount for a certain time.
- Liquid Asset:
- A cash asset or an asset that is
easily converted into cash.
- Merchandise Trade Balance:
- Released monthly, this figure
measures the difference between imports and exports. When
exports are higher than imports, there is a surplus in the
balance of trade. When imports are higher than exports,
there is a deficit. The import-export differential is
referred to as the trade gap.
- Money Supply:
- The amount of money in
circulation. M1 = cash + regular demand deposits + other
check-type deposits. M2 = M1 + savings and small
denomination time-deposits. When the money supply figure
is up, it is an inflationary factor and, therefore,
generates concern that the Federal Reserve will tighten
money growth by allowing short-term interest rates to
rise. Bond Market Moves Down In Price.
- Net Worth:
- The value of all of a person's
assets, including cash.
- Non-Farm Payroll:
- The non-farm payroll figure is a
component of total civilian employment and measures the
number of people employed in all activities except
agriculture.
- Non Liquid Asset:
- An asset that cannot easily be
converted into cash.
- Prime Rate:
- The interest rate that banks
charge to their preferred customers.Changes in the prime
rate influence changes in other rates, including mortgage
interest rates.
- Producer Price Index
(PPI):
- The monthly producer price index
measures the level of prices for all goods produced and
imported for sale in the primary marketplace. Increase in
the PPI tends to lead other measures of inflation. Bond
Market Moves Down In Price.
- Retail Sales:
- Key components of retail sales
include automobiles, building materials, furniture,
department store sales, food stores, gasoline, clothing,
restaurants and drugstores. High retail sales are an
indication of economic growth and an expanding economy.
Bond Market Moves Down In Price.
- Treasury Index:
- An index used to determine
interest rate changes for certain adjustable-rate mortgage
(ARM) plans. Based on the results of auctions that the
U.S. Treasury holds for its Treasury bills and securities
or derived from the U.S. Treasury's daily yield curve,
which is based on the closing market bid yields on
actively traded Treasury securities in the
over-the-counter market.
- Unemployment Rate:
- This is the percent of the
civilian labor force currently unemployed. If unemployment
figures are up, it indicates a lack of expansion within
the economy and is, therefore, good for the bond market.
Conversely, a big gain in employment would be an obvious
cue for the Federal Reserve to tighten (raise) either the
federal funds rate or the discount rate. Bond Market Moves
Up In Price.
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