Economic Indicators

Financial Signposts

An economic indicator is simply any economic statistic, such as the unemployment rate, Gross Domestic Product, or the inflation rate, which indicate how well the economy is doing and how well the economy is going to do in the future. 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, investors 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:

Three Attributes of Economic Indicators

Relation to the Business Cycle / Economy

Economic Indicators can have one of three different relationships to the economy:

• Pro-Cyclic: A pro-cyclic (or pro-cyclical) economic indicator is one that moves in the same direction as the economy. So if the economy is doing well, this number is usually increasing, whereas if we’re in a recession this indicator is decreasing. The Gross Domestic Product (GDP) is an example of a pro-cyclic economic indicator.
• Counter-Cyclic: A counter-cyclic (or counter-cyclical) economic indicator is one that moves in the opposite direction as the economy. The unemployment rate gets larger as the economy gets worse so it is a counter-cyclic economic indicator.
• Acyclic: An acyclic economic indicator is one that has no relation to the health of the economy and is generally of little use. The number of home runs the New York Yankees hit in a year generally has no relationship to the health of the economy, so we could say it is an acyclic economic indicator.

Frequency of the Data

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.

Economic indicators can be leading, lagging, or coincident relative to the economy.

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. Three Timing Types of Economic Indicators

• 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.
• 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.
• 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.

Next we will look at some of the 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:

• Total Output, Income, and Spending
• Employment, Unemployment, and Wages
• Production and Business Activity
• Prices
• Money, Credit, and Security Markets
• Federal Finance
• International Statistics

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.

Total Output, Income, and Spending

These tend to be the broadest measures of economic performance and include such statistics as:

• Gross Domestic Product (GDP)
• Real GDP
• Implicit Price Deflator for GDP
• Business Output
• National Income
• Consumption Expenditure
• Corporate Profits
• Real Gross Private Domestic Investment

These statistics are all updated quarterly. The Gross Domestic Product is used to measure economic activity and thus is both pro-cyclical and a coincident economic indicator. The Implicit Price Deflator is a measure of inflation. Inflation is pro-cyclical 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 pro-cyclical and coincident.