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they're talking about. What are economic indicators and why are they important?
A: An economic indicator is simply any economic statistic, such as the unemployment rate,
GDP, or the inflation rate, which indicate how well the economy is doing and how well the
economy is going to do in the future. As shown in the article "How Markets Use Information To
Set Prices" investors use all the information at their disposal to make decisions. If a set of
economic indicators suggest that the economy is going to do better or worse in the future than
they had previously expected, they may decide to change their investing strategy.
Economic Indicators can have one of three different relationships to the economy:
In most countries GDP figures are released quarterly (every three months) while the
unemployment rate is released monthly. Some economic indicators, such as the Dow
Jones Index, are available immediately and change every minute.
3. Timing
Economic Indicators can be leading, lagging, or coincident which indicates the timing of
their changes relative to how the economy as a whole changes.
1. Leading: Leading economic indicators are indicators which change before the
economy changes. Stock market returns are a leading indicator, as the stock market
usually begins to decline before the economy declines and they improve before the
economy begins to pull out of a recession. Leading economic indicators are the most
important type for investors as they help predict what the economy will be like in the
future.
2. Lagged: A lagged economic indicator is one that does not change direction
until a few quarters after the economy does. The unemployment rate is a lagged
economic indicator as unemployment tends to increase for 2 or 3 quarters after the
economy starts to improve.
3. Coincident: A coincident economic indicator is one that simply moves at the
same time the economy does. The Gross Domestic Product is a coincident indicator.
In the next section we will look at some economic indicators distributed by the U.S.
Government.
Many different groups collect and publish economic indicators, but the most important
American collection of economic indicators is published by The United States Congress. Their
Economic Indicators are published monthly and are available for download in PDF and TEXT
formats. The indicators fall into seven broad categories:
Each of the statistics in these categories helps create a picture of the performance of the
economy and how the economy is likely to do in the future.
These tend to be the most broad measures of economic performance and include such
statistics as:
The Gross Domestic Product is used to measure economic activity and thus is both procyclical
and a coincident economic indicator. The Implicit Price Deflator is a measure of inflation.
Inflation is procyclical as it tends to rise during booms and falls during periods of economic
weakness. Measures of inflation are also coincident indicators. Consumption and consumer
spending are also procyclical and coincident.
These statistics cover how strong the labor market is and they include the following:
The unemployment rate is a lagged, countercyclical statistic. The level of civilian employment
measures how many people are working so it is procyclic. Unlike the unemployment rate it is a
coincident economic indicator.
These statistics cover how much businesses are producing and the level of new construction in
the economy:
Prices
This category includes both the prices consumers pay as well as the prices businesses pay for
raw materials and include:
These measures are all measures of changes in the price level and thus measure inflation.
Inflation is procyclical and a coincident economic indicator.
These statistics measure the amount of money in the economy as well as interest rates and
include:
Nominal interest rates are influenced by inflation, so like inflation they tend to be procyclical
and a coincident economic indicator. Stock market returns are also procyclical but they are a
leading indicator of economic performance.
Federal Finance
These are measures of government spending and government deficits and debts:
Governments generally try to stimulate the economy during recessions and to do so they
increase spending without raising taxes. This causes both government spending and
government debt to rise during a recession, so they are countercyclical economic indicators.
They tend to be coincident to the business cycle.
International Trade
These are measure of how much the country is exporting and how much they are importing:
When times are good people tend to spend more money on both domestic and imported
goods. The level of exports tends not to change much during the business cycle. So the
balance of trade (or net exports) is countercyclical as imports outweigh exports during boom
periods. Measures of international trade tend to be coincident economic indicators.
While we cannot predict the future perfectly, economic indicators help us understand where
we are and where we are going. In the upcoming weeks I will be looking at individual
economic indicators to show how they interact with the economy and why they move in the
direction they do.