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The Lock-Up

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  1. U.S. Economic Indicators
  2. International Economic Indicators
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This chapter is from the book

International Economic Indicators

Up to now, we've been dealing only with U.S. economic reports. Now let's look at the growing importance of monitoring international economic indicators. During much of the twentieth century, Americans had only a remote interest in following the economic affairs of other nations. Few saw a need to take them more seriously. The U.S., after all, possessed the largest and most self-sufficient economy in the world and, by and large, had been impervious to the ups and downs of foreign economic cycles. If Germany or France or even the emerging countries of Asia suffered an economic downturn, barely anyone in the U.S. would care or even notice.

That's not the case any longer. Though the U.S. economy still reigns supreme, the international economy has undergone vast structural changes in the last three decades. These changes were brought on by a reduction in trade barriers, the modernization of global financial markets, and remarkable advances in telecommunications, the Internet, computer technology, and software. The results have been profound. The world economy now operates in a more tightly integrated fashion.

For the U.S., the implications are huge. Healthy domestic economic performance depends increasingly on how well other nations are doing. Gone forever are the days when this country was immune to financial and political mishaps originating halfway around the world. When OPEC decided to sharply boost oil prices in the mid-to-late 1970s, Americans felt real pain. Indeed, U.S. inflation subsequently exploded, ultimately leading to one of the worst U.S. recessions since the Great Depression. Years later investors took another beating during the Asian financial crises in 1997 when the Dow plummeted by the largest point loss ever on October 27 because investors were worried that problems in Asia would hurt the U.S. economy and corporate earnings. In addition, who would have imagined that a bond default by Russia in 1998—a country with an economy the size of Illinois and Wisconsin combined—would be considered so grave a threat to world financial markets that the Federal Reserve was under pressure to orchestrate a global rescue plan to calm investors worldwide?

Just how dependent have American companies become on other nations for profits and job creation? The numbers speak for themselves. Nearly half the earnings of S&P 500 firms come from business generated outside the U.S. More than 22 million American workers—nearly two in 10 jobs—are linked to foreign trade. One out of every four dollars generated in the U.S. economy is based on trade. What this all boils down to is that foreign economic indicators should be followed with the same regularity, interest, and scrutiny as the domestic indicators. If foreign economies do well, U.S. firms are in a better position to sell more exports, earn more money, and keep millions of American workers employed. By closely monitoring the international indicators, U.S. companies can seek out new foreign markets or decide whether to expand (or shut down) facilities overseas. American investors can diversify their portfolios more smartly by identifying and purchasing those foreign stocks and bonds that might offer a lucrative return.

Another important reason to monitor the performance of other major economies is that it helps us check the mood of foreign investors. As long as they view the U.S. as a safe and attractive place to invest, capital from abroad will continue to flow into this country, and that is vital for the well-being of the U.S. economy. Foreign investors play an indispensable role in financing U.S. economic growth by lending this country an average of nearly $2 billion a day—money that goes into buying stocks, bonds, and other American assets. Why does the U.S. need to borrow such huge sums from other nations? Because consumers and the federal government together spend so much on cars, computers, military hardware, and health care (to name just a few items) that there's little domestic savings left over. Yet savings is the lifeblood that keeps an economy healthy. It's used to finance productive investments, such as building efficient factories and funding the research and development of new and better products. Without adequate savings, the U.S. would be incapable of showing healthy long-term growth.

To make up for the shortfall in domestic savings, the U.S. has to lure the surplus savings of other countries. In addition, while all that foreign capital entering the U.S. has kept the economy humming, serious risks come with being so dependent on overseas creditors. America's total foreign debt has skyrocketed in the last decade from $50 billion to a staggering $1.5 trillion—the most of any nation in the world. In the process, foreigners have acquired an ever-increasing share of U.S. assets; they own 40% of all U.S. Treasury issues, 24% of American corporate bonds, and about 15% of all equities. Should the mood of those investors turn sour on the U.S. market—something that can occur if there is poor expectation of investment returns here as compared with other countries—it could spark a sell-off of American stocks and bonds by foreigners.

For all these reasons international economic indicators have lately taken on a more prominent role in the formulation of investment and business strategies. However, as with U.S. economic data, literally hundreds of foreign economic measures are released every month. With so much information being thrown at investors and business executives each day, how does one know which one of these statistics are worthy of consideration? There is no one simple answer to this question. American companies and investors have different interests and risk exposures in the global economy.

In this book, three factors are considered in determining the most influential international economic indicators. First, after the U.S., which are the largest economies in the world? Second, how liquid are the markets in those countries? That is, how easy is it to buy and sell securities on their exchanges? Third, who are the important trading partners of the U.S.? By trade, we're talking about the exchange of goods (such as the sale of trucks, pharmaceuticals, and computers) and the exchange of services (such as insurance, consulting, transportation, and entertainment). The service sector is especially important because it includes the all-important category of investment flows. (See Table 1E for a list of the "must-watch" international economic indicators.)

Table 1E. "Top Ten" International Economic Indicators

Rank

Indicator

Page

1

German Industrial Production

298

2

German IFO Business Survey

300

3

German Consumer Price Index

302

4

Japan Tankan Survey

306

5

Japan Industrial Production

312

6

France Monthly Business Survey (INSEE)

317

7

Eurozone/Global Purchasing Managers Index

320

8

OECD Composite Leading Indicators (CLI)

326

9

China Industrial Production

329

10

Brazil Industrial Production

334

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