"We need to move beyond gross domestic product as our main measure of progress, and fashion a sustainable development index that puts people first" - Ban Ki Moon (UN Secretary-General)
Economic indicators are the macroeconomic data that is used to predict future investment possibilities. These indicators are not limited to the variables given by Govt or the non-profit organizations. Any investor can establish an indicator. These indicators help us to analyse economic growth. They also serve as a basis of comparison for the past year and current year.
In simple words, economic indicators are stats that tell us where the economy is headed. They help us make investment related decisions like whether to buy or sell a property. Let us take a simple example- if stock market is an indicator then its fluctuations will help us to decide the best time to buy and sell the stocks.
These indicators help us understand the market, its flow better. In this blog you will understand more about these indicators and various types of economic indicators.
Types of Economic Indicators
You have read about the meaning of economic indicators above. Now let us discuss the types of economic indicators prevalent in an economy. There are three categories of economic indicators and investors usually know at what time of the year they should see them to get the exact idea about what they need.
These indicators are usually based on the future predictions in the economy but they are useful for predicting only a short term future as they change before the economy. They include yielding curves, share prices, net business formations etc. They can only be referred till a certain level as they can be incorrect sometimes.
These are one of the most valuable economic indicators as they provide useful information. They tell about the present status of the economy because they change at the same time the other changes take place. It includes employment level, GDP and retail sales. They can be used for real-time info of a particular region or area.
These indicators are most helpful when you are trying to predict specific patterns. You can make certain predictions about the patterns using these lagging indicators. But they cannot be used to speculate the entire economic change rather some specified patterns. It includes GNP, CPI, interest rates.
These economic indicators are useful only when interpreted right. In the past there is much evidence that has shown a correlation between GDP and economic growth.
But these indicators cannot tell whether a company will earn profit or not in the long run. These indicators show the signs and the best investors and interpreters will utilize them and develop meaningful insights out of them.
(Suggested blog- What is inflation?)
Examples of Economic Indicators and their Uses
Given below are examples of some of the leading, lagging and coincident economic indicators.
Examples of economic indicators
Gross domestic product also known as GDP is a type of lagging indicator. It is one of the most used and most gauged indicators to understand economic growth. GDP is calculated using 2 methods namely- income, and expenditure.
In the income method we calculate the incomes from all the factors of production like rent, interest, wages. Then we reduce the subsidies. In the expenditure method we compute the expenditures on consumption, investment and government.
The latter one is a better approach to compute the GDP. Increase in the GDP rate means more money is made by the businesses. In many countries like India quarterly measures are taken into account.
It is also a lagging indicator. Unemployment rates in America are calculated based on a fixed number of households. This rate shows the number of people that remained unemployed during the period.
It shows the people unemployed and also looking for a job. If companies are hiring more, this rate will decrease and it would imply that companies are performing well.
Producer price index called as PPI, is a coincident indicator. PPI gives the stats about the initial inflation at wholesale level before going on a retail level.
Prices of finished goods, intermediate goods and raw materials are all checked. PPI looks into all the producing sectors including and not limited to mining, forestry, manufacturing, airlines etc.
They are a type of lagging indicator. These rates are determined by the FOMC. When the rates increase borrowers do not want to take loans.
Thus it decreases the customer debt and business expansion and for some time the GDP will remain stagnant. If the rates are too less then it will lead to inflation. Current rates are the indicators of the current economic position of the country.
Consumer spending is a coincident indicator. Increase in consumer spending reflects inflation whereas less spending shows recession. Both these situations are extremely dangerous for an economy. Therefore, this economic indicator is one of the leading indicators that shows economic position.
It is a leading indicator. Even though it does not hold much significance in the economic position, people still refer to it to understand the market behaviour. If the market is up it means the share prices are high and companies are earning well which indirectly means economic growth.
If the prices are going down then the economic growth can remain stagnant. But the market is more about speculation so the stock market indicator is not a reliable source of economic growth.
Consumer price index also known as CPI is mostly used in America to understand and take into account the inflation. Changes in inflation means changes in monetary policies. Therefore, it is one of the most important lagging indicators in an economy.
It surveys around 200 different products in different categories. In simple words, with CPI we can find out the price paid by the consumers for a particular good or service. It also helps in determining the cost of living in a country.
Balance of trade
It is also a lagging indicator. Balance of Trade measures the difference between the exports and imports of a country. The result shows either a surplus, deficit. Countries always want a surplus because more exports help in increasing the forex reserves.
In simple words, more companies will come into the country through exports rather than leaving the country. Deficit implied debt. If the deficit remains in the long term then it would mean depreciation of the home currency.
Income and wages
Income and wages are also a lagging indicator. If the income of a person is rising such that he can attain an average cost of living then the company is doing well. If the incomes are less and not increasing then it implies that a company is either laying off or cutting the wages.
Incomes are divided based on gender, qualifications, profession, demographic and jobs. So these indicators can reveal if any particular area of workers are facing income and wage issues in a country.