Even outside the world of finance, the ubiquitous “economics” is a constant topic of discussion and analysis. Over the years and decades, the American economy has been variously described with words such as “faltering,” “sluggling,” “booming,” “strong,” and “growing,” among countless vague, optimistic and ominous descriptions.
But how do analysts come to these conclusions about the country’s overall economic health? What clues are there to help the financially curious view of the cloudy crystal ball that represents the country’s financial future?
The US economy is a complex whole with many moving parts, each of which affects (and is affected by) the others. It includes people, banks, companies, government agencies, wages, interest rates, raw materials, supply chains, products, and tradable securities such as stocks and bonds. Changes in one part of the economy often bleed into other parts, which is why investors, analysts, and financial professionals pay so much attention to economic data.
What are economic indicators and why are they important?
Economic indicators are simply broad macroeconomic statistics that shed light on one or more of the economy’s many interrelated components. These can include statistics about production, consumption, employment, wages, real estate, the stock market, and more.
When you share reports about the current or future health of the economy, that’s what they’re based on — changes in one or more macroeconomic statistics that you share Indicates Something about the state of the economy as a whole.
Gross Domestic Product, or Gross Domestic Product, for example, is one of the most popular economic indicators. It is a measure of a country’s total economic output over a given period (usually a year), or the total value of all final-stage goods and services produced and sold. When GDP rises from year to year, analysts say the economy is growing.
Other examples of major economic indicators include the unemployment rate, new home sales, and the yield curve.
Economic indicators like these are important because they help people, businesses, and governments make financial decisions. For example, the Federal Reserve may decide to raise interest rates if economic indicators indicate rising inflation. Investors may see economic indicators point to a looming recession and move money away from riskier investments such as stocks to more stable instruments such as money market funds.
What are the three types of economic indicators?
Economic indicators typically fall into one of the following three categories depending on the time period they highlight – in other words, whether they look backwards, look forwards, or provide real-time insight.
leading indicators
Leading indicators are sets of data that can be useful in predicting the future state of an economy. In other words, they are forward-looking and may indicate a shift in some part of the economy before it happens.
Because leading indicators are forward-looking, some are based on predictions or estimates rather than realistic data. And while they are very useful when it comes to making informed financial decisions, in retrospect they can sometimes prove inaccurate.
lagging indicators
Lagging indicators are groups of economic data that tend to change after a shift in some aspect of the economy has already occurred. In other words, they are looking backwards, which makes them very useful in confirming that an expected change or transformation has occurred in reality.
Because lagging indicators look back and are based on final data, they are considered very accurate and can be useful in determining where the United States is in its economic cycle.
Synchronized pointers
Matched indicators are groups of roughly current data. As economic conditions change, the coincident indicators change more or less. While some coincident indicators are actually slightly behind due to the difficulty of presenting real-time data, they are mainly reflections of the current situation of various economic factors.
Because coincident indicators provide information near real time, they are especially useful for policymakers such as the Federal Reserve in assessing whether current policy measures are working as they should or whether new measures are needed to address economic trends.
Examples of widely followed economic indicators by type
There are countless economic indicators used to assess a country’s economic situation, and different companies, government agencies, investors, and economists focus on different combinations of indicators for different reasons, but the following are some of the most widely discussed in general.
leading indicators
- Yield Curve: A yield curve is a graph in which bonds are plotted according to their yield (y-axis) and term (x-axis). When the yield curve is flat or negative (indicating that long-term bond yields fall toward or below short-term bond yields), economic weakness or even a recession may be likely in the near future.
- Unemployment claims rates: Initial jobless claims refers to the number of individuals who filed for unemployment during a given week but filed an nlot in the previous week, indicating that they became unemployed recently. Initial jobless claims tend to increase before economic weakness and decrease before economic strength and growth.
- Building permits and new buildings: Building permits represent the number of new building approvals for new or existing buildings in a given month, while housing starts represent the number of new construction projects that have already started in that month. Both are considered good forward-looking economic forecasts, as when it increases, it indicates that the builders are optimistic about the upcoming demand for real estate, and when it falls, it indicates that the builders expect a decrease in the demand for real estate.
- money supply: Money supply refers to the total amount of money circulating in the economy at any time. A high money supply usually indicates a strong economy in the near future with plenty of spending, while a low money supply can sometimes indicate an upcoming economic downturn.
lagging indicators
- Consumer Price Index: The CPI is an aggregate weighted measure of the average prices of goods and services in the United States, and changes in the CPI over time are used to measure inflation. The CPI is a lagging indicator because when it goes up, it shows that inflation has already occurred, and when it goes down, it shows that deflation has already occurred.
- Unemployment rate: The unemployment rate is the percentage of Americans who are seeking work and are currently unemployed. The unemployment rate rises when the economy is already beginning to weaken, and when it rises, it indicates that the economy has already begun to recover.
- Industrial production and capacity utilization: Industrial production and capacity utilization measures manufacturing output, which tends to correlate with consumer spending and GDP. Since this data is released a month after the fact, most consider IP/CU a lagging indicator.
Synchronized pointers
- Gross Domestic Production: While GDP (essentially a country’s economic output) is technically a lagging indicator, as data is released after the end of each month, many consider it an honorary coincidental indicator, as it is the primary measure of the state of the US economy, and tends to change relatively slowly.
- personal income: Personal income is a coincidental indicator because high incomes tend to coincide with a strong and healthy economy, while low incomes tend to coincide with a weaker economy.
- Non-farm jobs: Nonfarm payroll measures private sector and government employment added or lost each month. Again, this is technically a lagging indicator, but most consider it simultaneous because it tends to move up and down in a close step as the economy is healthy. More jobs tend to indicate a growing economy, while fewer jobs tend to indicate a weaker economy.