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A guide to economic indicators and their impact on investing

J.P. Morgan Investment Academy Series

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Reading the signs

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Economic indicators are the road signs of market trends and conditions ahead.

Economic growth Jobs Turnaround indicators

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Defining the term “economic indicator”

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Economists and investors use a wide range of indicators to forecast or interpret the market.

Key economic indicators

Price of crude oil

Gross domestic product

Consumer price index

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Leading, lagging and coincident indicators

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Each indicator plays a different role in understanding the economy.

Leading indicators– Help to predict what the economy or a particular market will do in the future.

Lagging indicators– Confirm the trends or patterns that leading indicators predict.

The unemployment rate, for example, is a lagging indicator.

Coincident indicators– Mirror what the data are saying — what’s happening right now.

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Measuring the Gross Domestic Product (GDP)

Single most important indicator used to assess economic growth

Nominal GDP vs. Real GDP– Nominal GDP expresses value in current prices

– Real GDP is adjusted for price inflation

– Calculating real GDP growth enables economists to determine if production increased or decreased, regardless of changes in the purchasing power of the currency

Published quarterly by the U.S. Dept. of Commerce, Bureau of Economic Analysis

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The GDP expresses the value of all goods and services made, sold and exported during the reporting period.

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Using GDP as a forecast tool

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Source: BEA, JPMorgan Asset Management.

Data reflects most recently available as of 9/30/12. GDP values shown in legend are % change vs. prior quarter annualized and reflect 2Q12 GDP.

While rising GDP indicates economic growth, falling GDP indicates potential recession.

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Drilling down to the components of GDP

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Economists study the shifting categories of GDP to better understand the economy.

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Analyzing the outlook for jobs

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Jobless Claims is a leading economic indicator for assessing unemployment.

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Assessing the larger unemployment picture

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Consumer confidence and spending are closely linked to job market information.

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Gauging likely consumer spending

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Consumer Sentiment is a lagging indicator that shows how consumers feel about the health of the economy.

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Tracking a potential turnaround

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Increased housing starts and light vehicle sales may signal economic stabilization.

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Measuring inflation with the consumer price index (CPI)

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CPI is one of the most widely anticipated and watched economic indicators.

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Understanding why CPI matters

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Source: Starbucks

Rising prices can affect investors and consumers differently.

Starbucks price increases, in average price per drink, since 2000 at company-owned U.S. stores.

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Assessing the impact of interest rates on inflation

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While the stock market typically reacts negatively to rising interest rates, the bond market can have mixed reactions.

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Summarizing our discussion

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Greater knowledge of economic indicators leads to a better understanding of the economy and world markets.

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Disclosure

The above commentary is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.

© J.P. Morgan Chase & Co., December 2012

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