This is a revised and expanded edition of a book originally published in 2004. The first edition featured 12 well-known economic data series including housing, unemployment and other widely publicized releases. These familiar reports are gathered by government agencies like the Bureau of Labor Statistics or private research groups like the Conference Board. This most recent edition builds on the previous effort by introducing a family of market-driven indicators from the fixed-income and commodity sectors. All in all, this refined text is a welcome contribution to our understanding of economic fundamentals. The discussion is authoritative yet concise, inclusive in range and research.
Yamarone is at the top of his field as a veteran Wall Street economist. He brings unmistakable expertise to the task of explaining the history, composition and interpretation of economic reports so often cited and so little understood. Each of the fourteen chapters of the book highlights one family of economic indicators. All chapters conclude with a section called “Tricks of the Trenches,” a firsthand account of how Wall Street professionals exploit each report in a way the broader public might not.
For example, as indicators of inflation, Yamarone says Wall Street insiders favor GDP deflators rather than conventional inflation measures like CPI and PPI. Another little-known indicator favored by professional economists is the output gap: the difference between the economy's actual production and its estimated potential. When actual GDP growth is well above the calculated estimate, inflation is a hazard and the fixed-income sector tends to suffer. When actual growth falls well below theoretical performance, the output gap is a boon to bonds and stocks.
While no tactical trading tips are furnished, Yamarone provides specific quantitative benchmarks for interpreting the economic statistics. When monthly nonfarm payrolls decline by 150,000 or so, it's a sign of gathering economic weakness. Likewise, when the four-week moving average of unemployment claims climbs above 400,000, job creation is deemed stagnant. Levels of capacity utilization below 78% indicate a developing or ongoing recession. A Purchasing Managers Index reading above 50 is generally positive for stocks, negative for bonds. The opposite is the case for readings below 50. My favorite insider statistic is the “RV Indicator.” Recreational vehicles are usually purchased out of discretionary income. When expenditures on these vehicles slump, it's a good bet economic weakness will follow. But Yamarone furnishes no concrete trading formulas based on varying indicator levels, and as interesting as they are, they are only general guidelines.
Yamarone is clearly a man wholly absorbed and delighted in his professional calling. He chronicles the history of each indicator in a detailed, richly worded narrative. You could say Yamarone thrives on economic releases with the enthusiasm an Oxford don might savor some rare text and the book is sharply focused and well written.
Nelson Freeburg is editor of Formula Research, a financial letter that builds and tests quantitative timing models for stocks, bonds, and commodities. Formula Research serves systematic traders and institutional money managers in 27 countries.