Page 94 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 6: Economic Fundamentals and Foreign Exchange Risk Exposure

Generally, the most commonly used employment figure is not the monthly unemployment Notes
rate, which is released as a percentage, but the nonfarm payroll rate. The rate figure is calculated
as the ratio of the difference between the total labor force and the employed labor force, divided
by the total labor force. The data is more complex, though, and it generates more information.
In foreign exchange, the standard indicators monitored by traders are the unemployment rate,
manufacturing payrolls, nonfarm payrolls, average earnings, and average workweek. Generally,
the most significant employment data are manufacturing and nonfarm payrolls, followed by
the unemployment rate.

Auto Sales

Despite the importance of the auto industry in terms of both production and sales, the level of
auto sales is not an economic indicator widely followed by foreign exchange traders. The American
automakers experienced a long, steady market share loss, only to start rebounding in the early
1990s. But car manufacturing has become increasingly internationalized, with American cars
being assembled outside the United States and Japanese and German cars assembled within the
United States. Because of their confusing nature, auto sales figures cannot easily be used in
foreign exchange analysis.

Leading Indicators

The leading indicators consist of the following economic indicators:
1. Average workweek of production workers in manufacturing;

2. Average weekly claims for state unemployment;
3. New orders for consumer goods and materials (adjusted for inflation);
4. Vendor performance (companies receiving slower deliveries from suppliers);
5. Contracts and orders for plant and equipment (adjusted for inflation);

6. New building permits issued;
7. Change in manufacturers’ unfilled orders, durable goods;.
8. Change in sensitive materials prices.

Personal Income

Personal Income is the income received by individuals, nonprofit institutions, and private trust
funds. Components of this indicator include wages and salaries, rental income, dividends, interest
earnings, and transfer payments (Social Security, state unemployment insurance, and veterans’
benefits). The wages and salaries reflect the underlying economic conditions.
This indicator is vital for the sales sector. Without an adequate personal income and a propensity
to purchase, consumer purchases of durable and nondurable goods are limited.

Self Assessment

Fill in the blanks:
1. …………………… indicators are reports released by the government or a private
organization that detail a country’s economic performance.

2. The …………………… measures the economic performance of the whole economy.

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