Economies Microeconomics
Economic Indicator
What Is Economic Indicator?
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. These indicators also help to judge the
overall health of an economy.
Economic indicators can be anything the investor chooses, but
specific pieces of data released by the 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
- Price of crude oil
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Economic Indicator
Economic Indicator Explained
Economic indicators can be divided into categories or groups. Most of
these economic indicators have a specific schedule for release,
allowing investors to prepare for and plan on seeing certain information at certain times of the month and year.
Leading indicators,
such as the yield curve, consumer durables, net business formations,
and share prices, are used to predict the future movements of an
economy. The numbers or data on these financial guideposts will move or
change before the economy, thus their category's name. Consideration of
the information from these indicators must be taken with a grain of
salt, as they can be incorrect.
Coincident indicators,
which include such things as GDP, employment levels and retail sales,
are seen with the occurrence of specific economic activities. This class
of metrics shows the activity of a particular area or region. Many
policymakers and economist follow this real-time data.
Lagging indicators,
such as gross national product (GNP), CPI, unemployment rates and
interest rates, are only seen after a specific economic activity occurs.
As the name implies, these data sets show information after the event
has happened. This trailing indicator is a technical indicator that
comes after large economic shifts.
Key Takeaways
- 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.
- Indicators also help to judge the overall health of an economy.
- Economic indicators can be anything the investor chooses, but specific pieces of data released by the government and non-profit organizations have become widely followed.
- Indicators can be leading—before events, lagging—after events, or coincident—real-time data sets.
Interpreting Economic Indicators
An economic indicator is only useful if one interprets it correctly. History has shown strong correlations between economic growth,
as measured by GDP, and corporate profit growth. However, determining
whether a specific company may grow its earnings based on one indicator
of GDP is nearly impossible.
Indicators provide signs along the road, but the best investors
utilize many economic indicators, combining them to glean insight into
patterns and verifications within multiple sets of data.
There is no denying the objective importance of interest rates, gross
domestic product, and existing home sales or other indexes. Why
objectively important? Because what you're really measuring is the cost
of money, spending, investment, and the activity level of a major
portion of the overall economy.
Real World Example
Leading indicators forecast where an economy is headed. One of the
top leading indicators is the stock market. Though not the most critical
leading indicator, it’s the one that most people look at. Because stock
prices factor in forward-looking performance, the market can indicate
the economy’s direction, if earnings estimates are accurate.
A strong market may suggest that earnings estimates are up, which may
suggest overall economic activity is up. Conversely, a down market may
indicate that company earnings are expected to suffer. However, there
are limitations to the usefulness of the stock market as an indicator
because performance to estimates is not guaranteed, so there is a risk.
Also, stocks are subject to price manipulations caused by Wall Street
traders and corporations. Manipulations can include inflating stock
prices via high-volume trades, complex financial derivative strategies
and creative accounting principles—both legal and illegal. The stock
market is also vulnerable to the emergence of “bubbles,” which may give a
false positive regarding the market’s direction.
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