Economic indicators are economic data which is used to interpret future or current investment possibilities at the macro level by analysts. Economic indicators are also used to determine an economy’s overall health as well as understand how the market works and other crucial financial factors.
These indicators can be classified into groups or categories. Most of the indicators have a release schedule, which enables investors to prepare for and plan on the information at different times of the year.
There are different types of economic indicators, and we discuss them below. You can also visit our AccuIndex Academy to learn how to use other indicators in your trading strategy.
Types of Indicators
They include: coincident, lagging and leading indicators.
The coincident indicators offer valuable information about the present state of the economy in a specific area, as it happens in real time.
The indicators in this category include retail sales, levels of employment and gross domestic product, as seen with the occurrence of particular economic activities. Most economists and policymakers follow this data keenly for decision making.
These indicators usually follow changes in the economy. Generally, they help confirm particular patterns in the economy, which can then be used to make economic forecasts.
It should be noted though that these indicators can’t be used to directly predict changes in the economy. They include interest rates, rates of unemployment and gross national product, which are observed after a certain economic activity or when a large economic shift takes place.
These indicators suggest future changes in the economy, and they’re very useful for making short-term predictions of economic developments. This is because they change before the economy changes.
They include share prices, net business formations, consumer durables and the yield curve, which can be used to forecast the future movements of an economy. One should keep in mind that the data or numbers from these indicators may be incorrect, and as such, they should be taken with a grain of salt.
How are economic indicators used?
There exists different types of economic indicators, as we’ve seen above, which can help financial analysts, economists and investors make conscious financial decisions. Below are some of the uses of these indicators.
Balance of Trade
The balance of trade is a lagging indicator which shows the net difference between the value of exports and imports in a country. Balance of trade demonstrates whether there’s a trade deficit or a trade surplus.
Producer Price Index
This is a coincident indicator which tracks the change in price of nearly all sectors that produce goods, like the fishing, forestry, agriculture, manufacturing and mining sectors. This indicator also tracks the changes in price for a growing portion of the non-goods-producing sectors of the economy. Producer Price Index is the first inflation measure available in the month.
Consumer Price Index
This is lagging indicator which is commonly used as an indicator of inflation. Changes in inflation can prompt the Fed to change its monetary policy.
Consumer Price Index measures changes in price paid for services and goods by consumers in a particular month. This index is essentially a measure of the change in the cost of living. It provides a gauge of inflation.
This is a lagging indicator whose rate is determined via a monthly survey. It estimates the proportion of citizens in a country who were unemployed during the period when the survey was conducted.
The rate of unemployment only shows the number of unemployed individuals who are currently looking for work.
Gross Domestic Product
This is a lagging indicator that can be used to gauge an economy’s health. Gross domestic product represents the size of the economy of a country or its economic growth and production. While measuring this indicator can be a bit challenging, there are 2 ways it can be measured. This includes the expenditure method and the income approach method.
The expenditure approach is an aggregate of what every individual spent in one year, inclusive of investments, net exports, government spending and total consumption.
On the other hand, the income approach is a sum of what every individual earned in one year, inclusive of total compensation to employees, taxes less subsidies, incorporated and non-incorporated firms.
The results of these two approaches should be the same, give or take a margin of error. Of the two though, the expenditure approach is more common as it includes consumer spending, which makes up most of the gross domestic product of a country.
The stock market
Prices of stocks are partly based off of what firms expect to earn. If the earning estimates of a firm are accurate, this indicator can help to show the direction of the economy. The stock market is a leading indicator which is at risk of manipulation. This vulnerability also affects the market’s accuracy, which means that an index or stock price isn’t a reliable reflection of its value.
It is crucial to keep in mind that stock market bubbles sometimes show false positives regarding the direction of the economy. Unsupported increases in price levels and investors ignoring underlying economic indicators could result in a crash in the market.
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