Key economic statistics known as economic indicators can provide you with a clearer understanding of the direction the economy is moving in. Investors can use these indications to determine whether to buy or sell securities.
Types of Economic Indicators
Economic indicators come in multiple groups or categories. There are three types
Future developments in the economy are predicted by leading indicators. They frequently change before the economy does, making them very helpful for making short-term predictions of economic developments.
Typically, lagging indications appear after the economy has changed. They are typically most useful when used to validate particular patterns. Lagging indicators cannot be used to anticipate economic change directly, although economic projections based on patterns can be made.
Indicators of coincidence
Because they occur at the same time as the changes they indicate, coincident indicators can reveal important information about the status of the local economy.
Top Economic Indicators and how they used
a. Gross Domestic Product (GDP)
b. The Stock Market
d. Consumer Price Index (CPI)
e. Producer Price Index (PPI)
f. Balance of Trade
g. Housing Starts
h. Interest Rates
i. Currency Strength
j. Manufacturing Activity
Gross Domestic Product
It is a lagging indicator. It is one of the first indicators used to gauge the health of an economy. It represents economic production and growth, or the size of the economy. Measuring GDP can be complicated, but there are 2 basic ways to measure it. One measurement is the income approach. This approach adds up what everyone earned in a year, including gross profits for non-incorporated and incorporated firms, taxes less any subsidies, and total compensation to employees. The other approach is the expenditure method.
This method adds up what everyone spent in a year, including total consumption, government spending, net exports, and investments. The results of these two measurements should be roughly the same. However, the expenditure method is the more common approach because it includes consumer spending, which accounts for the majority of a country’s GDP.
The Stock Market
The stock market is a leading indicator. It’s also the indicator that most people look to first, even though it’s not the most important indicator. Stock prices are partially based on what companies are expected to earn. If companies’ earnings estimates are accurate, the stock market can indicate the economy’s direction. For example, a down market could indicate that overall company earnings are expected to decrease, and the economy could be headed toward a recession. On the other hand, an upmarket could suggest that earnings estimates are up and therefore the economy may be thriving.
Unemployment is a lagging indicator. The unemployment rate only reflects people who are unemployed and looking for work. The number of jobs created or lost in a month is an indicator of economic health and can significantly impact the securities markets. When more businesses are hiring, it suggests that businesses are performing well. More hiring can also lead to predictions that more people will have more money to spend since more of them are employed.
To be continued.