Economic Indicators

Economic indicators are key measurements showing the direction of an economy. Economic indicators can be leading, coincident, or lagging.
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Leading indicators precede economic output measures and are used to forecast economic activity. Coincident indicators coincide with the current level of economic activity. Lagging indicators lag behind the overall pace of economic activity and are backward-looking. 

Leading indicators include average weekly manufacturing hours, average weekly initial jobless claims, manufacturer’s new orders, stock prices, and housing permits.

Coincident indicators are data like industrial production or manufacturing sales.

Lagging indicators are data such as the average duration of unemployment, commercial and industrial loans outstanding, and changes in the consumer price index.  

Gross Domestic Product (GDP)

Gross domestic product (GDP) measures the market value of goods and services produced over a period of time. GDP measures the economic output of a country.

GDP is expanding when the GDP is higher for a period than the same period the previous year. GDP is contracting, or the economic activity of a country is declining, when the GDP is lower for a period when compared to the same period the previous year. GDP is an indicator of the standard of living for the residents of a country.

The two most commonly used measures of GDP are nominal GDP and real GDP. Nominal GDP is the dollar value of the economic output of a current year. Real GDP is nominal GDP adjusted for inflation. High inflation distorts a country’s nominal GDP and makes real GDP a more important indicator of economic growth than nominal GDP.

Business Cycle

The business cycle refers to the cyclical rise and fall of economic activity in a country. The business cycle has four stages: peak, contraction, trough, and expansion. Expansion occurs during times of rising GDP, while contraction occurs during times of declining GDP.

Historically, the technical definition of a recession from an economic indicator perspective has been two consecutive quarters of decline in real GDP. Early expansion occurs as an economy begins to grow after a recession. As the expansion matures, growth declines, and the economy peaks.

Following the peak, an economy contracts as growth slows. The contraction continues through an economic recession until growth returns and the cycle repeats. The business cycle may also be referred to as the “boom/bust” cycle.

Image of business cycle with various arts of the economic cycle displayed

Yield Curve

The yield curve is a graph depicting the relationship between interest rates and time to maturity. Interest rates are plotted from the shortest maturity to the longest maturity.

A positive slope means that long-term rates are higher than short-term rates, while the positioning of the line on the Y-axis shows the overall level of interest rates across maturities.

The yield curve typically shows short-term interest rates lower than long-term interest rates (positive slope). This relationship is a normal yield curve.

An inverted yield curve has short-term interest rates higher than long-term interest rates. A flat yield curve has relatively little difference between short-term and long-term interest rates. Investors typically require higher interest rates for longer periods, so a normal yield curve is upward sloping.

During times of economic uncertainty and changes in interest rate policy by central banks, the yield curve may invert as investor demand for the security of short-term investments increases.

The yield curve is used to gauge investors’ expectations for future economic growth. Lower short-term interest rates are generally associated with economic downturns. As short-term interest rates increase, the economic outlook is typically stronger.

Flat, normal, inverted, and steep yield curves

Consumer Price Index (CPI)

The consumer price index (CPI) is a standard measure of consumer goods price inflation. CPI measures the average monthly change for a basket of goods and services bought by consumers. Components of CPI include food, transportation, shelter, utilities, clothing, medical care, and entertainment. Core CPI excludes food and energy from the index.

As the cost of the basket of goods in the index increases, CPI increases. Inflation is the percentage change in the CPI from one period to the next. Rising inflation may distort nominal GDP, so CPI is important to calculating real GDP. There is typically an inverse relationship between inflation and real GDP.

High inflation increases the cost of capital via higher interest rates. As the cost of capital increases, corporate borrowing decreases. Decreased borrowing tends to signal decreased corporate spending and less economic expansion.

Unemployment Rate

The unemployment rate is the percentage of a country’s labor force that is unemployed but seeking employment. Each month, the unemployment rate is published by the Bureau of Labor Statistics (BLS) in the nonfarm payrolls report. The numerator of the unemployment rate is the number of unemployed persons currently seeking a job, while the denominator is the number of people in the workforce.

The headline, or overall, unemployment rate can be deceiving. Many elements of the nonfarm payroll report, aside from the headline unemployment rate, are important. The unemployment rate may rise because of an increase in the number of unemployed or because workforce participation declines. Labor force participation is the labor force divided by the nonmilitary working-age population. A decline in labor force participation may signal decreased economic output in the future.

Underemployed individuals are those with part-time employment but desire full-time employment. Underemployed individuals are, therefore, not producing economic output at their full potential.

Important wage and efficiency information come from the nonfarm payroll report as well. Average hourly earnings is an important indicator of potential inflation, and the average workweek for all employees is a significant productivity indicator.

Jobless Claims

Jobless claims represent the number of people filing claims to receive unemployment insurance benefits. Jobless claims are reported weekly.

Initial jobless claims measure the number of individuals filing for unemployment insurance for the first time in the past week. Continuing jobless claims are those who filed an initial claim and are receiving unemployment benefits. An increase in either initial jobless claims or continuing claims is a bearish economic indicator and indicates a potential increase in the unemployment rate.

Both initial claims and continuing claims may be relatively volatile, so many analysts use a four-week average to gauge employment trends.

Balance of Trade

The balance of trade refers to the net difference between a country’s imports and exports of goods over a period of time. When a country exports more than it imports, the country has a favorable balance of trade.

Balance of trade should be considered when measuring a country’s export or import of services. Balance of trade is a component of a country’s current account, which is a primary component of a country’s balance of payments. The balance of payments also incorporates a country’s imports and exports of capital and foreign aid.

A favorable balance of trade often translates into a higher standard of living for a country because capital flows into the country as a result of the purchase of goods.

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FAQs

What are the leading economic indicators supposed to predict?

Economic indicators are key measurements showing the direction of an economy. Leading indicators precede economic output measures and are used to forecast economic activity. Leading indicators include average weekly manufacturing hours, average weekly initial jobless claims, manufacturer’s new orders, stock prices, and housing permits.

Which economic indicator describes the process of generally declining prices?

Deflation is the economic indicator associated with declining prices of consumer goods and services. Deflation is typically a result of recessionary economic periods when demand for goods decreases. Deflation makes it less expensive for consumers to purchase products; however, this creates less profit for corporations.

The Federal Reserve is responsible for using monetary policy to combat high levels of inflation and deflation.

Which economic indicator measures inflation?

The consumer price index (CPI) is a standard measure of consumer goods price inflation. CPI measures the average monthly change for a basket of goods and services bought by consumers.

Components of CPI include food, transportation, shelter, utilities, clothing, medical care, and entertainment. As the cost of the basket of goods in the index increases, CPI increases. Inflation is the percentage change in the CPI from one period to the next.

How is GDP calculated?

Gross domestic product (GDP) measures the market value of goods and services produced over a period of time. GDP measures the economic output of a country. Nominal GDP is the dollar value of the economic output of a current year. Real GDP is nominal GDP adjusted for inflation.

GDP is calculated by adding together consumer spending, net exports, business investments, and government spending. GDP can also be calculated by finding the national income, including wages, interest returns, profits, and rent. 

What are the 4 stages of the business cycle?

The four stages of the business cycle are peak, contraction, trough, and expansion. The business cycle refers to the cyclical rise and fall of economic activity in a country.

Expansion occurs during times of rising GDP, while contraction occurs during times of declining GDP. Early expansion occurs as an economy begins to grow after a recession. As the expansion matures, growth declines, and the economy peaks.

Following the peak, an economy contracts as growth slows. The contraction continues through an economic recession until growth returns, and the cycle repeats.

What is an inverted yield curve?

The yield curve is a graph depicting the relationship between interest rates and time to maturity.

Interest rates are plotted from the shortest maturity to the longest maturity. The resulting graph typically shows short-term interest rates being lower than long-term interest rates. This relationship is a normal yield curve.

An inverted yield curve has short-term interest rates higher than long-term interest rates. During times of economic uncertainty and changes in interest rate policy by central banks, the yield curve may invert as investor demand for the security of short-term investments increases. 

Is CPI the same as inflation?

The consumer price index (CPI) is an indicator used to measure inflation. The CPI is a standard measure of consumer goods price inflation. CPI measures the average monthly change for a basket of goods and services bought by consumers. Inflation is the percentage change in the CPI from one period to the next.

How to calculate CPI?

The consumer price index (CPI) is a standard measure of consumer goods price inflation. CPI measures the average monthly change for a basket of goods and services bought by consumers. Components of CPI include food, transportation, shelter, utilities, clothing, medical care, and entertainment.

How do you calculate the unemployment rate?

The unemployment rate is the percentage of a country’s labor force that is unemployed but seeking employment. The unemployment rate is published each month by the Bureau of Labor Statistics (BLS) in the nonfarm payrolls report. The numerator of the unemployment rate is the number of unemployed persons, while the denominator is the number of people in the workforce.

How might the unemployment rate overstate the amount of joblessness?

The unemployment rate may overstate the amount of joblessness because someone who is considered unemployed and is not actively trying to find work will be counted. Also, unreported legal employment and unreported illegal employment may be included in the unemployment rate.

Why is the balance of trade important?

The balance of trade refers to the net difference between a country’s imports and exports of goods over a period of time. Balance of trade is a component of a country’s current account, which is a primary component of a country’s balance of payments.

A favorable balance of trade often translates into a higher standard of living for a country because capital flows into the country as a result of the purchase of goods. 

How do you calculate trade balance?

The balance of trade is calculated by finding the net difference between a country’s imports and exports of goods over a period of time. Subtract the total amount of imports from the amount of exports to find the trade balance.

Does the balance of trade include services?

Yes, the balance of trade is a measure of the total amount of exports and imports of goods and services for a country.

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