What are economic indicators and why are they important

what are economic indicators and why are they important

4 Key Indicators That Move The Markets

So, what are the leading indicators? Here are salient ones and why they are important: 1. Employment: More employed people means a healthier economy. It means one in which consumer spending likely increases, leading to increased sales for all affected companies, driving higher profits and increased dividends for shareholders. 2. Nov 11,  · Among the many indicators, there are 4 key economic indicators that economists usually use either to compare the changes in economic performance of a country over time or to compare the economic performance of different countries. The 4 key economic indicators are: 1) National Income Statistics 2) Inflation rateAuthor: Social Scientist.

An economic indicator is simply any economic statistic, such as the unemployment rate, GDP, or the inflation ratewhich 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. To understand economic indicators, we must understand the ways in which economic indicators differ.

There are three major attributes each economic indicator has:. Many different groups collect and publish economic indicators, but the most important American collection of economic indicators is published by the United States Congress.

The indicators fall into seven broad categories:. Each of the statistics in these categories what are economic indicators and why are they important 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 broadest 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 what are economic indicators and why are they important 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:. Changes in business inventories is an important leading economic indicator as they indicate changes in consumer demand.

New construction including new home construction is another procyclical leading indicator which is watched closely by investors. A slowdown in the housing market during a boom often indicates that a recession is coming, whereas a rise in the new housing market during a recession usually means how to setup a wlan there are better times ahead. 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.

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. These are a 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. Share Flipboard Email. Social Sciences Economics U. Mike Moffatt. Professor of Business, Economics, and Public Policy.

Mike Moffatt, Ph. Updated February 19, Cite this Article Format. Moffatt, Mike. A Beginner's Guide to Economic Indicators. Online Macroeconomics Textbook Resources. Economics for Beginners: Understanding the Basics. What Are the Phases of the Business Cycle? How Small Business Drives U. Economic Stagflation in a Historical Context. The Government's Role in the Economy.

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Sep 17,  · Leading economic indicators are statistics that provide insights into economic health, business cycle stages, and the status of consumers within an economy. They lead, or appear before, broader changes in the economy and indicate what economic changes will be happening soon. Leading economic indicators provide monthly tracking of business-cycle activity. They give consumers, business leaders, and policy-makers a glimpse into where the economy might be headed. When leading indicators rise today, then the rest .

Even before getting into the content, the above topic is subjective, not to mention that it could be fairly misleading. Two things to note before we begin — a leading indicator is one that helps determine economic changes and a lagging indicator follows economic changes. A lagging indicator generally, they are a fundamental factor to look at. GDP or the Gross Domestic Product is the monetary value of goods and services produced in the country.

The growth rate in GDP if consistent is obviously considered good. It creates further complications if the authenticity of fundamental numbers is in question. This is a leading indicator. The money borrowed can be used in many ways depending on who is issuing debt — to finance asset purchases, to pay equity holders, to fund projects, to take levered risks on trades, etc.

When there is more borrowing than the ability to pay down the dues [preferably through legitimate income! Other ways in which debt can be taken are either domestically or from abroad. Debt cycles come in the form of short term debt cycles lasting around years the financial crisis marked the end of a short term debt cycle which started after the dot com bubble and long term debt cycles which may come once in a lifetime.

Post the financial meltdown, lower interest rates were almost forced upon in many economies to spur growth and investments. This incentivized borrowing and debt filled economies but sadly with little growth. The worrisome part is that China is slowing down although its Debt is currently seen as serviceable due to its FX Reserves, past growth income, etc. Similar debt-related sorrowful episodes are faced by many economies — recently Puerto Rico defaulted on its sovereign debt. In the recent past, Argentina and Greece have come close to being debt defaulters and; the LTCM hedge fund crisis saw Russia defaulting on its sovereign debt amongst several other examples.

In general, excessive inflation can cause a fall in the exchange rate, high-interest rates to curb it, demand and supply-side issues and blowing-up of prices — economic terrorism where everyone is a hostage. Inflation expectations determine the way inflation would evolve in the future. It is calculated in many ways.

Friends and Enemies: Indicators like the wage-price index, job growth, unemployment numbers, payroll numbers can at times, add an upward push or take a toll on inflation. They are lagging indicators of economic stability. In the current environment of slow growth and disinflation not to be confused with deflation , inflation is considered vital. In the past, hyperinflation was fear. Inflation is a basic indicator to see whether your country and other economies are in shape or not.

The exchange rate is in general compared with the US Dollar. Within exchange rates, there are two areas we must focus on. Central Banks sometimes depreciate their exchange rate to boost inflation and enhance exports and appreciate the exchange rate to do the opposite. That leads to further depreciation and causes a lot of instability which may be difficult to sort out.

Now it stands at Rs. But there was a time in when the INR was falling heavily and one would argue that it is still falling a lot. But on a REER basis it has performed better than other currencies which is why the INR is one of the better performing currencies over the last few years. But the Brazilian Real and many other currencies have performed quite poorly underlining the state of their economies.

You would know about the Chinese currency devaluation so to speak in August from a band around CNY 6. This is really simple but critical stuff. Monetary economics and policies suggest that interest rates majorly drive economic activity. Although it can be argued, they are one of the most important factors. Policy rates set by Central Banks have been seen with even more interest and expectation than Roger Federer winning an 18 th Grand Slam.

Even a fractional move nowadays is seen as an anticipated big boost or a bust. Policy rates are both, a lagging and leading indicator to be honest. The Treasury Bond or T-Bond rate which is generally the year rate [and is considered the benchmark risk free asset] is also a major indicator and can tell you whether the environment is in a recession.

Sometimes, diversions and correlations between T-Bonds and the stock market can yield crucial conclusions for traders. Negative policy rates in countries suggest poor economies and very low to negative year bond rates can indicate a heavy safe-haven investment or a possible recession if the treasury yield curve is downward sloping.

Gold is considered a safe-haven asset and tends to go up in value if there is a recession like a tendency in the world economy just like prices of US and German T-Bonds. Although there are deeper facets to understand in gold price movements, other Precious Metals like silver and platinum prices also must be looked at to confirm our take on gold.

Several studies on correlations between these metals have been done. Arguably, gold is also considered a hedge against inflation in an economy. It reflects the sentiments of investors and traders alike, on the companies that form the stock index and the macro decisions that affect these sentiments. Volatility is the risk we see due to large fluctuations on either side of the index but is tilted more to the downside — market volatility is measured by the volatility index.

In July , there was some inconsistency observed between the US Volatility Index and the premiums on Credit Default Swaps [CDS contracts are used as insurance to protect against events of default] as they generally move in tandem. At times, the Volatility Index and T-Bond yields have moved in tandem which might give you a sense of mispricing in asset classes — since greater volatility makes people invest money in safe securities like T-Bonds, thus pushing their prices up and yields down bond prices and yields are inversely related.

A good indicator right? Simply put, they are the extra expected return you get for facing volatility and risk of a security or index. On a macro basis, higher country risk premiums indicate higher expected returns but with a higher risk. A higher spread indicates a higher perceived risk in the economy. Other important types of risk premiums to look for include liquidity premiums , optionality premiums, CDS spreads and inflation premiums. During the credit crisis of , credit spreads blew over the roof.

Below is a chart of CDS premiums around the crisis. Here, they were an indicator of credit risk in the economy building up. A higher deficit has to be financed and is generally done by issuing government debt, thereby raising money.

This again gets linked to the debt spiral and weakening exchange rates. A surplus would reduce debt but may reduce the incentive to push reforms ahead given that the economy seemingly looks strong. Strong and consistent FDI flows are an unambiguous good while weakness would indicate a drop in bullish sentiment. Japan runs a Current Account Surplus but have been sent to the cleaners for the last 20 odd years in terms of economic growth and seems to be a losing proposition to invest in.

India has cut down its CAD from around 3. Crude oil is a major component which tends to affect crude importing economies and energy-related industries positively when its price falls if they are net importers and negatively if they are net exporters.

Due to the fall in oil prices, countries like India have benefited from the fall in their CAD while others like the Gulf nations, Russia and Venezuela have faced heavy currency volatility and deficits due to their dependence on oil, being exporters. Given the fact that the OPEC [Organization of Petroleum Exporting Countries] still dominate control over the price of crude, stubbornness to cut down production which will lead to a rise in oil prices is creating a problem.

This is because they are competing against an alternative resource known as Shale Gas and amongst themselves, especially Saudi Arabia and Iran. We have possibly covered the whole gamut of economic indicators to be given importance in every heading. Technically, there are easily more than 10 economic indicators mentioned. Keep in mind that political factors are equally important and to be coupled with the economic ones. The most important economic indicator to choose from the above ten?

Combining all of them to come up with your independent stance is the best and most important of all. Good luck working on that! Free Investment Banking Course. Login details for this Free course will be emailed to you. This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy.

Forgot Password? Economic Indicators Even before getting into the content, the above topic is subjective, not to mention that it could be fairly misleading. Let me tell you fair and straight that there are easily more than ten indicators. Similarly, this topic is subjective by nature. I, the writer may not be the best in the subject simply because no one is the best when it comes to the field of finance and economics.

Thus, the ten indicators mentioned might not be the best indicators at all times. Is Roger Federer the greatest tennis player ever?

Or regarding this subject, is Warren Buffett the best investor ever? If you are an investment expert, your top ten might be different not only from mine but also from Mr.

The third reason is subtle yet blatant because this would interest you, the reader to believe that this is the key to success in your investment decisions. So here is the disclaimer you have not been hoping for — the indicators mentioned are generally looked at indicators and could be used to make investment decisions at your own risk.

The pleasure is mine to point this out to you. Read the papers and you would know about a lot of global events. In order to have a good recap of the events making news, they have been used as examples to support the ten indicators which you will see. The given indicators will try to cover as much as possible by including several other factors that form part of an indicator to help appreciate their interrelatedness. Given these ten indicators are subjective, some of them may not be found in another article if you Google the same heading.

To specifically note, the ones mentioned here are not from a collection of multiple Google searches. I sincerely hope that reading this would enhance your knowledge and make you start looking at the financial world differently.

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