Handbook of Investment research—economic and financial indicators as market movers. . - book review

Business Economics, Jan, 2003 by Mathias Moersch

By Conrad Mattern. 2002. Hampshire and New York, NY Palgrave Macmillan. Pp. 464. $80.00 hardcover.

This book provides a comprehensive overview and detailed interpretation of economic indicators in both the United States and the Euro Zone. In addition to being a complete reference volume, the book has two particularly appealing features. First, it offers a unified treatment of Euro Zone data and in the process describes many of the problems that still limit their usefulness. Second, it not only describes the data, but also evaluates them from the perspective of a business economist who has spend many years interpreting economic data releases and their effect on financial markets.

Especially for analysts used to the high quality and reliability of U.S. statistics, interpreting Euro Zone data poses new challenges. First, the Euro Zone is a rather young entity and therefore only limited historical evidence is available. Data series were either not collected at the national level prior to the creation of the Euro Zone or the computation of historical data based on national sources is complicated by a lack of harmonization. Second, harmonization of national statistics still has a long way to go. While considerable progress has been made over the past years, significant differences in national methods remain. As an example, industrial production data in France are unavailable during the summer holidays: no data are published in July and instead an average value for July and August is released. Also, the joint existence of several methods to seasonally adjust data remains a source of confusion. For example, in Germany there is still disagreement between the national statistics office and the central bank about the best way to seasonally adjust industrial production data. Third, release dates at the national level are still not fully standardized. While the exact release times for most indicators are announced in advance, a few series still do not have set publication schedules.

The fact that Euro Zone data are published mainly on the basis of previously released national data has important practical implications. Due to the--at times substantial--publication lag between national and Euro Zone data, financial market participants focus almost exclusively on the national releases. Knowledge of the data in the five largest countries--France, Germany, Italy, Netherlands and Spain--allows an accurate estimate of the aggregate in the Euro Zone.

The second contribution of Mattern is his thorough assessment of the indicators' relevance. All indicators are ranked from A to E, with A representing the greatest influence on financial markets. The ranking was derived from two sources. First, event studies on the relationship between data releases and financial market reactions and second, a survey of business economists. Mattern identifies three A rated indicators, which all come from the United States: the labor market report, producer prices, and consumer prices. About a dozen indicators deserve a B rating according to Mattern. They are evenly split between the United States and the Euro Zone and include such variables as national accounts, industrial production, and the leading industry surveys.

In addition, the author provides detailed observations about the use of the indicators in the forecasting process. In a notes section for each indicator, he takes up issues such as appropriate data transformations (e.g., the use of moving averages to smooth out volatile series), correlation coefficients and historical lag/lead relationships among different series, or the causes and likely size of revisions.

The book opens with a short but useful general discussion about the construction of economic indicators. The section covers issues such as seasonal adjustment, data revisions, and creation of index numbers or construction of deflators. Part II on the United States and part III on the Euro Zone constitute the bulk of the book.

The indicators for both the United States and the Euro Zone are organized by categories. These are (1) overall activity, including leading economic indicators; (2) company surveys; (3) labor market indicators;(4) consumer indicators; (5) investment indicators; (6) international transaction indicators; (7) inflation figures; and (8) monetary aggregates.

For each indicator, eight points are covered:

1. Data source. Gives the publishing organization, including its Internet address. Additional useful details for obtaining the data are also given.

2. Impact on financial markets. Provides a ranking of the indicators from A to E, with A indicating the greatest influence on financial markets.

3. Description of the indicator. Gives information about the indicator including sub-categories and (especially for Europe) regional coverage.

4. Publication date and data revisions. Provides the publication time and the publication lag. Also includes details about revisions.

5. Seasonal adjustments. Spells out whether the data are seasonally adjusted and which method is used.