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International Financial Management

Notes Business Inventories

Business inventories consist of items produced and held for future sale.
The compilation of this information is facile and holds little surprise for the market. Moreover,
financial management and computerization help control business inventories in unprecedented
ways. Therefore, the importance of this indicator for foreign exchange traders is limited.

Construction Indicators

Construction indicators constitute significant economic indicators that are included in the
calculation of the GDP of the United States. Moreover, housing has traditionally been the engine
that pulled the U.S. economy out of recessions after World War II. These indicators are classified
into three major categories: (1) housing starts and permits; (2) new and existing one-family
home sales and (3) construction spending.
Private housing is monitored closely at all the major stages (See Figure 6.1). Private housing is
classified based on the number of units (one, two, three, four, five, or more); region (Northeast,
West, Midwest, and South); and inside or outside metropolitan statistical areas.

Figure 6.1: Diagram of Construction of Private Housing

Construction indicators are cyclical and very sensitive to the level of interest rates (and
consequently mortgage rates) and the level of disposable income. Low interest rates alone may
not be able to generate a high demand for housing, though. As the situation in the early 1990s
demonstrated, despite historically low mortgage rates in the United States, housing increased
only marginally, as a result of the lack of job security in a weak economy.
Housing starts between one and a half and two million units reflect a strong economy, whereas
a figure of approximately one million units suggests that the economy is in recession.

Inflation Indicators

The rate of inflation is the widespread rise in prices. Therefore, gauging inflation is a vital
macroeconomic task. Traders watch the development of inflation closely, because the method of
choice for fighting inflation is raising the interest rates, and higher interest rates tend to support
the local currency.
Moreover, the inflation rate is used to “deflate” nominal interest rates and the GNP or GDP to
their real values in order to achieve a more accurate measure of the data.
The values of the real interest rates or real GNP and GDP are of the utmost importance to the
money managers and traders of international financial instruments, allowing them to accurately
compare opportunities worldwide.
To measure inflation traders use following economic tools:

Producer Price Index (PPI);

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