Mortgage Glossary, Loan
Terms and Economic Terms for Interest Only Loans
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Mortgage Glossary - Ecomomic Terms
Business Inventories And Sales:
These figures measure the inventories and sales of manufacturing, wholesalers,
and retail establishments. These figures are released monthly by the Bureau
of Census. In most cases, an increase in these numbers indicates an expanding
economy which could be inflationary. Bond Market Moves Down In Price.
Capacity Utilization:
The capacity utilization rate measures the percent of industrial output currently
in use. A change in the rate indicates a change in the direction of economic
activity. As the percentage rate moves closer to 90% the industrial output
is practically at full capacity and is inflationary. A number closer to 70%
is recessionary. A higher percentage indicates a stronger manufacturing sector
and an expanding economy which can be inflationary. Bond Market Moves Down
in Price.
Consumer Price Index (CPI):
The consumer price index is an indicator of the general level of prices. Components
include energy, food and beverages, housing, apparel, transportation, medical
care, and entertainment. When the consumer price index goes up, it is a sign
of an inflationary environment. Consumers have to pay more for the same amount
of goods and services. Bond Market Moves Down In Price.
Durable Goods Orders:
This gives a reading on the country's future manufacturing activity. Durable
goods include those manufactured items with a normal life expectancy of three
years or longer. An increase in the amount of durable goods orders may indicate
an expansion in the economy and, if inflationary, the Federal Reserve could
choose to tighten money by raising interest rates. Bond Market Moves Down
In Price.
Effect Of Economic Indicators On Fixed Income Investments:
Market participants look to U.S. Government economic releases as an indication
of the economy's strength and general direction. Overall, economic indicators
reflect the rate of economic growth and inflation which, in turn, affects
interest rates. There is an inverse relationship between interest rates and
bond prices. If the economic indicators indicate that the rate of inflation
is on the rise, it will most likely result in higher interest rates and lower
bond prices. Conversely, if these indicators indicate the rate of inflation
is falling this will result in lower interest rates and higher bond prices.
The following glossary defines what these indicators are and how they might
affect the bond market.
Factory Orders:
Manufacturer's shipments, inventories, and orders. Factory orders include shipments,
inventories, and new and unfilled orders. An increase in the factory order
total may indicate an expansion in the economy and could be an inflationary
factor. Bond Market Moves Down In Price.
FED Is Easing:
Exactly the opposite of Fed tightening. The Federal Reserve feels that the
economy is not growing at the desired level and eases credit conditions by
lowering interest rates to help stimulate the economy. Bond Market Moves
Up In Price.
FED Is Tightening:
This term refers to efforts by the Federal Reserve to curb excessive growth
in the money supply. This can be accomplished by raising the discount rate
and/or increasing the federal funds rate. Bond Market Moves Down In Price.
Gross National Product (GNP):
The Gross National Product is the broadest measure of the nation's production.
It measures the market value of all newly produced goods and services in
the United States. When GNP is down, it shows a slowing down in the economy.
To counteract this, the Federal Reserve may loosen money by lowering interest
rates. Bond Market Moves Up In Price.
Industrial Production Index:
The industrial production index measures the monthly level of the physical
output of the manufacturing, mining, and gas and electric utility industries.
When industrial production is down, it indicates a slowing of economic growth
and, therefore, the Federal Reserve is inclined to allow interest rates to
drop to stimulate the economy. Bond Market Moves Up In Price.
Leading Economic Indicators:
This index is a composite of 11 statistics designed to foretell economic activity
6 to 9 months hence, (i.e. building permits, new orders for consumer goods
and materials, the average workweek, index of consumer expectations).
Merchandise Trade Balance:
Released monthly, this figure measures the difference between imports and exports.
When exports are higher than imports, there is a surplus in the balance of
trade. When imports are higher than exports, there is a deficit. The import-export
differential is referred to as the trade gap.
Money Supply:
The amount of money in circulation. M1 = cash + regular demand deposits + other
check-type deposits. M2 = M1 + savings and small denomination time-deposits.
When the money supply figure is up, it is an inflationary factor and, therefore,
generates concern that the Federal Reserve will tighten money growth by allowing
short-term interest rates to rise. Bond Market Moves Down In Price.
Non-Farm Payroll:
The non-farm payroll figure is a component of total civilian employment and
measures the number of people employed in all activities except agriculture.
Producer Price Index (PPI):
The monthly producer price index measures the level of prices for all goods
produced and imported for sale in the primary marketplace. Increase in the
PPI tends to lead other measures of inflation. Bond Market Moves Down In
Price.
Retail Sales:
Key components of retail sales include automobiles, building materials, furniture,
department store sales, food stores, gasoline, clothing, restaurants and
drugstores. High retail sales are an indication of economic growth and an
expanding economy. Bond Market Moves Down In Price.
Unemployment Rate:
This is the percent of the civilian labor force currently unemployed. If unemployment
figures are up, it indicates a lack of expansion within the economy and is,
therefore, good for the bond market. Conversely, a big gain in employment
would be an obvious cue for the Federal Reserve to tighten (raise) either
the federal funds rate or the discount rate. Bond Market Moves Up In Price.
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