Question

identify and explain the role of various types of economic indicators in the economic analysis.

Answer 1

An economic indicator is a piece of economic data, usually of macroeconomic scale, that is used by analysts to interpret current or future investment possibilities or to judge the overall health of an economy. Economic indicators can be anything the investor chooses, but specific pieces of data released by government and non-profit organizations have become widely followed. Such indicators include but aren't limited to: the consumer price index (CPI), gross domestic product (GDP), unemployment figures and the price of crude oil.

(1) Leading indicators (such as new orders for consumer durables, net business formation, and share prices) that attempt to predict the economy's direction,

(2) Coincident indicators (such as gross domestic product, employment levels, retail sales) that show up together with the occurrence of associated economic activity, and

(3) Lagging indicators (such as gross national product, consumer price index, interest rates) that become apparent only after the occurrence of associated economic activity.

Leading Indicators

Leading indicators are usually short-term predictors of the economy and, as mentioned above, come before the economy changes as a whole. The stock market is usually a leading indicator because it will rise in the months before the rest of the economy expands. The market usually begins to improve before the general economy does because money is being directly pumped into the economy via the markets.

The unemployment claims are also major leading indicators of economic activity. Each week or month a report will come out on how many new unemployment claims have been filed. It is usually an indication that the economy is getting better when the number of new claims decline over a period of months.

The manufacturers' orders for consumer goods and materials is another major leading indicator for the performance of the economy. This is an indicator because an increase in orders for consumer goods usually indicates that the economy is getting better, production is increasing, and people are able to afford more goods.

The Standard & Poor's 500 (S&P 500) is another leading indicator of the economy. The S&P 500 is a stock market index that is based on the market capitalization of the 500 largest companies in the stock market. This is a leading indicator because it shows investors' confidence in the economy and their expectations. As the index rises, so does the confidence of investors and the economy.

Money supply is also a leading indicator for economic performance. In this context, the money supply measures deposits, commercial lending, and inter-bank lending. An increase in these measurements can indicate that the economy is expanding and that the economy will soon increase. The opposite is true as well -- when money supply decreases and savings increase, the economy will soon decline.

The index of consumer expectations is one of the only leading indicators that is purely speculative. This means that there is no data which backs its measurement. This index is based on the business cycle and presumed consumer expectations, which can indicate future consumer spending. For example, it is assumed that consumer spending will increase around holidays, such as during Christmas and in the months of July and August, when most people take their family vacations. It is assumed that consumer spending will decrease in the month following December, and increase again in March and April to coincide with tax season.

Economic Indicator Examples

An example of an indicator with a major impact is the Non-Farm Payrolls (NFP), published on each month’s first Friday by the U.S. Bureau of Labor Statistics. This report reveals change in the number of employed people in the US from the previous month, excluding the farming industry. That covers approximately 80% of the US work force. An increase in the number of newly employed people usually indicates the market is growing. As a result, the American Dollar will grow stronger. If a trader speculated that beforehand, and opened buying positions prior to the announcement – the outcomes would be to his favour. Naturally, if the there is a slowdown in employment the Dollar will weaken. Either way, the NFP and the speculations beforehand will cause vibrations in different instruments.

The most recent Euro centric example would be the ECB Interest Rate Decision, that is announced by the European Central Bank. If the ECB are hawkish about the inflationary outlook of the European economy and they raise the interest rates, it is seen as a positive sign for the EUR and the trend would be on a bullish curve. The opposite would be true for the ECB if they keep the current interest rate going, or they decide to cut the interest rate the EUR will suffer and be on a bearish trend. Should the outcome of the indicator be as expected the EUR will not see much impact, however if the predicted outcome is not as expected the element of ‘surprise’ will have the greater market impact.

The Caixin Purchasing Managers’ Index (PMI) is a specific measurement of nationwide manufacturing activity, where attention is given to smaller and medium-sized companies. The news came in during the December 2015 announcement, that this month’s PMI came in lower than the expected figure. The general fear is that, as a result, manufacturers continue to cut on their staff numbers in turn lowering their production output.

Other types of Economic Indicator review market growth demand and supply figures and many other factors that impact markets, instruments, companies and traders as one.

For the most part, current economic indicators the United States point towards an end to the recession and general inflation of the economy, even though many people are still suffering from unemployment and a previous loss of investments.

Economic indicators are often combined to produce a composite view of economic performance. For example, the state of Florida, on July 11, 2016, released an analysis on its economic indicators for the month of May 2016. The analysis consisted of its CPI, employment levels, unemployment insurance, unemployment rate, real estate and housing price index.

It was found that Florida's CPI for the month of May 2016 was slightly higher than the national average. Employment within the state grew by 24,000 jobs from April to May, a good sign. Unemployment claims, measured on a four-week moving average, remained well below the state's peak in 2009, which resulted in an unemployment rate of 4.7%, equal to the national average for May. Finally, new homes in Florida dropped by 9.1% and housing prices increased by 2%, which may cause slight concern.