In our last lesson we gave an introduction to fundamental analysis with an introduction to the top down approach to analyzing fundamentals and the US Economy. In today’s lesson we are going to expand our discussion on the US economy by looking at the different pieces which make up the economy and how each piece is relevant to us as traders of the stock, futures, and/or forex markets.
The first component of any economy is its natural resources. One of the key factors that allowed the United States to grow so quickly and become one of the world powers that it is today, is that it is a land that is rich in natural resources from oil which drives our industry, to lumber to build our houses, to our large coastlines, great lakes, and rivers which provide shipping access and move goods throughout the country.
Understanding what natural resources are most important to a country and understanding what affects the prices of those resources is beneficial to not only commodities traders who trade the actual commodities such as oil and gold but also to traders of the stock and forex markets. We will go into these correlations in more detail in later lessons but a short example is that the US economy relies heavily on oil, so when the price of oil goes higher this is normally seen as a negative for the US Economy as it then costs more for companies to ship their goods, and for individuals to fill up their cars leaving them less money to spend. Similarly, as the US Imports much of its oil, when the price of oil goes up this means that more dollars are being sold and converted into the currencies of the countries which are exporting the oil to
the US, therefore all else being equal weakening the US Dollar and strengthening the currency of the exporting country.
The next component of any economy is its labor force, or the individuals who are working in that economy to produce goods and services from the countries natural resources. As the labor force in an economy gets paid for their labor, and then spends that money on the goods and services they and other components of the labor force have produced, they are an important driver of growth in any economy.
The components which are watched in regards to labor are the size of the labor force in an economy, its rate of growth, its productivity level, and its skill level, and its mobility or ability to adapt to changing conditions. Another reason why the United States has the largest economy in the world is the size of its labor force is constantly growing allowing the economy to produce and sell more goods and services, it is a relatively mobile labor force which has allowed it to increase productivity faster than other nations through things such as early adoption of new technology, and it is an educated labor force.
Why is this important from a trading standpoint? Here again we will go into more detail on this when we look at important economic numbers but a short example is if the labor force becomes more productive, this means that they are able to produce more goods in the same amount of time. This not only makes companies more profitable but it holds down prices for the consumer, giving them more money to spend on other goods and services, which drives growth, which means a higher stock market all else being equal. This ncreased growth can cause higher demand for commodities therefore causing the commodities markets to rally all else being equal, and can also have interest rate implications, something we will learn about in later lessons, which can affect the US Dollar.
That’s our lesson for today. You should now have a good understanding of the first two components of the US economy its natural resources and labor force. I hope you are also beginning to see how the fundamentals are intertwined into all markets, so at least having a basic understanding of them is important regardless of whether you are basing your trading decisions on them or not. In the next lesson we are going to look at the second two pieces of an economy: the Private Enterprise and the Government and the role that each of these play so we hope to see you in that lesson.