Capital Properties FX
Capital Properties FX

3 Fundamental Analysis Tips for Reading GDP


“Neither a borrower, nor a lender be; for loan oft loses both itself and friend.” – William Shakespeare – HAMLET

When it comes to trading or investing, fundamental analysis is an essential part of your toolkit. Without it, it’s almost impossible to make a viable argument, why to sell or buy some sort of assets. In today’s world, it’s virtually unimaginable to predict price movements without knowing anything about the underlying basics of how our economies work.

In currency trading, there has always been a slight standoff between those who rely more on fundamentals and those who rely more on technicals. I’d say both have good arguments to justify their views but in the end, those who want to succeed, need to use them both. It is especially important when one chooses to trade forex.

However, when it comes to trading and financial markets, nothing is ever straight forward. There is always the case of how to interpret information. Fundamental analysis is only useful when one has the capability to arrive at the right conclusion. It’s not always that easy since we have a lot of different data and economic indicators that sometimes contradict each other.

Fundamental Analysis for Beginners

U.S. GDP – Advance or Final?

The gross domestic product is one of the main indicators to assess the health of a country’s economy. Last Friday we had the U.S. quarterly (advance) GDP release which was arguably the most awaited event of the week.  I mean, anyone wanting to know what is Forex day trading must be aware of that! The figure itself came in slightly below expectations and hence the US dollar was briefly sold across the board.

Since it was the “advance” release, it’s quite normal that the market acted more aggressively. It is the “first look” of the health of one’s economy and hence it draws a lot of attention. What is important here, is to keep in mind that the advance release will be revised twice. Hence, while it draws a lot of attention, it’s not the final figure and should not be used to draw big conclusions.

For example in 2015, United States’ second-quarter GDP figure was revised from 2.3 percent (advance) to 3.9 percent (the final release). Similar situations happened in 2014 when the 3rd quarter GDP was revised from 3.5 percent to 5.0 percent. Both of these revisions are significant and paint a very clear picture that when it comes to the GDP, one should wait for the final figure. This would be heard in a future Yellen speech.

Using the correct numbers in your fundamental analysis plays a big role. Quite often, I stumble on charts and analysis that include figures which have long been revised to different levels. It’s an easy mistake to make but the consequences could turn out to be rather severe. Relying on false information could lead to disastrous trading decisions.

The Focus Should Remain on Services Sector

The United States is a service-based economy and hence the focus should always remain on the service sector. In the U.S. approximately 81 percent of the entire labor force works in services related fields. And this number will grow as we go forward. In reality, more than half of the total labor force on Earth works in the “office” providing some sort of service.

Current U.S. President Donald Trump has said that he wants to “change” that by re-starting the U.S. manufacturing sector. Manufacturing accounts for about 12-15 percent of the entire U.S. economic output. Hence, it’s understandable that the current administration in the White House wants to see a change in that department. Don’t forget that less than 50 years ago, the U.S. manufacturing sector made up almost 25 percent of the entire GDP.

However, since all that is history, these days one should always focus on the services sector. Any slowdown in job creation or wages there will have an immediate impact on the GDP as well.

Revisions

Revisions are common when it comes to such things as the gross domestic product. These calculations are massive and it takes a lot of time to put it all together. According to the Bureau of Economic Analysis in the U.S. the advance GDP figure, on average, is revised 1.1 percent lower/higher in the final release.

Another reason for the revisions is the fact that the BEA doesn’t have all the information at the time of the advance release. And with that, we have circled back to the beginning of the article where I stated that the first release of the GDP should not be used to draw big conclusions.

Even though Friday’s GDP figure came in at 1.9 percent, which was much weaker than many expected, we could still see a healthy revision in two months. In general, using revised numbers or “final” numbers in your fundamental analysis is essential. Otherwise, you’ll just end up with figures that paint the wrong picture of the given situation. And unfortunately, every piece of misleading information could have a negative effect on our trades and investments.

Recommended further readings:

Fundamental analysis, future earnings, and stock prices.” Abarbanell, Jeffrey S., and Brian J. Bushee. Journal of Accounting Research 35, no. 1 (1997): 1-24.
Political determinants of international currencies: What future for the US dollar?“. Review of international political economy Helleiner, E. (2008). , 15(3), 354-378.