Economic Indicators

In order to follow the daily financial news, an investor has to understand what economic indicators are and how they will affect the economy. An economic indicator is a statistic like the Unemployment Rate or the Gross Domestic Product.  This information is generated and published by many entities, including the United States Congress, on a monthly or quarterly basis.  In the case of an indicator like the Dow Jones Index, information is available every day.  This data is available to anyone in its pure form, but many investors, financial planners, and even economic advisors get most of their information from the media, where it has been analyzed and put into some sort of perspective. 

Once economic indicators are gathered from the government and other organizations, they are categorized into broad groups which analysts then put together to form a comprehensive picture of the economy:

• Total output, income and spending reports include the Gross Domestic Product with separate statistics on inflation. The other statistics in this report concern corporate profits, consumer spending, business output, national income and domestic investment.  It is essentially what the country makes as opposed to what it spends. 
• Employment, Unemployment and Wages measures how many people are working and what they are earning. 
• Business Production and Activity reports concern industrial production, new construction, private housing and vacancy rates, business sales, and manufacturers’ shipments. 
• Prices reports include producers’ prices, consumers’ prices, and farming prices received and paid. 
• Money, Credit and Security Markets reports have information on bank credit, consumer credit, interest rates and stock prices.
• Federal Finance has the figures for Federal receipts, outlays, and debt.
• International Trade reports provide information on industrial production and consumer prices of major industrial countries, U.S. international trade in goods and services, and U.S. international transactions.

Economic indicators also have different characteristics which dictate the amount of impact they will have on the economy.  Awareness of these differences is the key to making better decisions when it comes to investing and financial planning.  Economic indicators can be procyclic, countercyclic, or acyclic.  A procyclic indicator will follow the same path as the economy.  An increase in a procyclic indicator like the Gross Domestic Product would be reflected in a strong economy.  If the GDP instead were to decrease, it would mean that the economy could be headed for a recession.  A countercyclic indicator goes in the opposite direction of the economy.  A countercyclic indicator like the Unemployment Rate will grow as the economy worsens.  An acyclic indicator has little effect on the economy.  An example of an acyclic indicator would be a statistic like the number of roses in the garden at the White House.

Economic indicators also work on a time table.  They can be identified as leading, lagged, or coincident.  Leading indicators change before the economy does and are used by investors to predict the future of the economy.  The stock market is the most watched leading indicator by financial planners because it is the first indicator to rise or fall before the economy does.  Lagged indicators usually surface about two or three quarters after the economy has changed.  Unemployment is a lagged indicator that will rise or fall well after the strength of the economy shifts.  Coincident economic indicators, like the Gross Domestic Product, move as the economy does.

Posted in Economic Growth & Development