Macroeconomics is “the study of how households and firms make decisions and how they interact in markets”(Mankiw, 2012, p. 29). While microeconomics is “the study of economywide phenomena, including inflation, unemployment, and economic growth”(Mankiw, 2012, p. 29). Understanding economic indicators is an integral part of assessing the economy as a whole. Economic indicators allow the government, businesses, and consumers, alike, to analyze and predict the future status of the economy. It is important to recognize the source of changes and how they ultimately, affect the economy.
This paper will explain six economic indicators: Gross domestic product (GDP), unemployment, productivity, consumer price index (CPI), money supply, and consumer credit report. It will also explain the business cycle, why they it is utilized and show the importance through charts and graphs, Economic Indicators “Economic indicators are key statistics showing the state of the economy. These include the average workweek, weekly claims for unemployment insurance, new orders, vendor performance, stock prices, and changes in the money supply”(Friedman, 2012, p. 225). Leading Economic Indicators
“Leading indicators are economic statistics that often change direction before the general economy changes. Stock market indexes are considered leading indicators, as stock indexes often decline before the economy declines and improve before the general economy recovers from a recession. Leading economic indicators therefore help predict the future economy”(Friedman, 2012, p. 396). Lagging Economic Indicators “Lagging Indicators are economic indicators that change after a change in the economy has occurred. Lagging indicators are observed as a means of confirming trends”(Friedman, 2012, p. 391).
Definition – Gross Domestic Product is (GDP) “a figure that represents the total value of all goods and services produced in a country in a given time period. More simply, it is a measure of the total size of an economy “(Riggs, 2008, p. 96). How is the economic indicator determined? “It is calculated using the selling prices in the period in question of the “final” goods”(Kolb2008, p. 1044). “Government economists calculate GDP every quarter (in the financial world, each year is commonly broken down, for purposes of analysis, into four three-month periods called quarters), as well as yearly.
It is used by government officials as an aid in creating policies, by business leaders in making business decisions, and by economists to improve their understanding of the economy”(Riggs, 2008, p. 96). What it measures? “In order to avoid counting certain goods (those that are part of other goods) multiple times, GDP measures only what are known as final products, or products that are sold to consumers on the open market” (Riggs, 2008, p. 96). Strengths, weakness, problems, or criticisms Strengths (Barnes, 2013): •GDP is considered the broadest indicator of economic output and growth.
Real GDP takes inflation into account, allowing for comparisons against other historical time periods. •The Bureau of Economic Analysis issues its own analysis document with each GDP release, which is a great investor tool for analyzing figures and trends, and reading highlights of the very lengthy full release Weakness (Barnes, 2013): •Data is not very timely – it is only released quarterly. •Revisions can change historical figures measurably (the difference between 3% and 3. 5% GDP growth is a big one in terms of monetary policy) Historical Data – GDP reflects how much we would actually pay for something and is therefore, the market value.
The chart below reflects GDP from 2007 through 2012. it is a reflection of the market value of all final goods and services, produced within the country between this period. GROSS DOMESTIC PRODUCT (BEA, 2013) ? Definition – Unemployment is “the state of being unemployed; can also mean the rate of unemployment (the percentage of a nation’s workforce that cannot find jobs)”(Riggs, 2008). The national unemployment rate is defined as the percentage of unemployed workers in the total labor force. It is widely recognized as a key indicator of labor market performance”(Investopedia, 2013).
How is the economic indicator determined? “In any given month, the flow between these three pools of employed, unemployed, and out of the labor force creates the “measured unemployment rate. ” By the BLS definition, the unemployment rate I percentage terms is the ratio of the number of unemployed divided by the labor force times 100”(Kolb, 2008, p. 2134). Unemployment is determined by the total number of workers (employed plus unemployed). “Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work.
Persons who were not working and were waiting to be recalled to a job from which they had been temporarily laid off are also included as unemployed”(Investopedia, 2013). What it measures? “Unemployment measures the total number of employed, unemployed, or not in the labor force. It measures job losers, job leavers, and new entrants/reentrants into the labor force”(Kolb, 2008, 2133) Strengths, weakness, problems, or criticisms Strengths (Mankiw, 2012): •Unemployment insurance •Government programs •Usually short term 6-9 months Weakness (Mankiw, 2012):
Some workers give up the job search because they cannot find worker and essentially become discouraged. •Structural unemployment for company-wide lay-offs Historical Data There are four main causes of unemployment: cyclical, frictional, seasonal, and structural unemployment. These are associated with different economic situations and different economic concepts. The chart below list the percentage rate unemployment for 16 years and older from 2007 to 2012. Labor Force Statistics from the Current Population Survey Original Data Value Series Id:LNS14000000
Jumps in productivity tend to make their way to corporate bottom lines quickly via margin expansion. •Release shows results with and without the effects of inflation •Detailed productivity measures at the industry and sector level allow investors to analyze the relative productivity performance of many of their holdings. •One of very few indicators that shows results compared to other advanced economies; shows how the U. S. stacks up against the world in terms of productivity gains. •Productivity results represent the lion’s share of total GDP (about 75%); only government results and nonprofit groups are removed from calculations.
Weakness (Barnes, 2013): •Not a timely indicator; first report comes five weeks after the quarter, and the revised report nearly two months •No new series of data is released, only derivations of previous data sets •Can be very volatile quarter to quarter; long-term measurements are the most effective use of this indicator when analyzing sustainable, long-term rates of productivity growth Historical Data- Maximizing output became even more important after the Industrial Revolution because of the high costs associated with mass producing goods.
Thus, not long after the rise of factories came an outpouring of productivity and efficiency studies as well as numerous methods for getting the most possible output from a factory”(Riggs, 2008, p. 194). Major Sector Productivity and Costs Original Data Value Series Id:PRS85006092 Sector:Nonfarm Business Measure:Labor productivity (output per hour) Duration:Percent change from previous quarter at annual rate Base Year:- Years:2007 to 2012 YearQtr1Qtr2Qtr3Qtr4Annual 2007-0. 23. 34.
A large increase in the CPI over a short period of time represents growing inflation, and a drop in the CPI signifies deflation, both of which can be harmful to an individual’s finances and a nation’s economy”(Riggs, 2008, p. 108). What it measures? “CPI measures the change in prices that consumers pay for goods and services from year to year”(Riggs, 2008, p. 108). Strengths, weakness, problems, or criticisms Strengths (Barnes, 2013): •Gives most insight into future Fed rate moves •Highly watched and analyzed in the media •Good regional and industry breakdowns for investor research Weakness (Barnes, 2013): •Volatile month to month
What it measures? “Consumer credit is considered a good indicator of the potential future spending levels seen in the Personal Consumption and Retail Sales reports, and shows the extent to which benchmark interest rates such as the fed funds rate and prime rate have manifested themselves at the consumer level (it can take six months to a year for macro interest rates to work their way down to consumers)”(Barnes, 2013). Strengths, weakness, problems, or criticisms Strengths (Barnes, 2013):
•Contains detailed breakdown of auto loan figures, such as average maturity and prevailing interest rates •Data is provided with and without seasonal adjustments. •Release shows comparisons against previous month, previous year, and also against results from the last five years Weakness (Barnes, 2013): •Only total growth in outstanding loans is shown; there is no way of knowing if consumer payments have fallen off or if new loan growth has slowed based on a falling consumer credit number (and vice versa). •Absence of home-equity debt provides for an incomplete picture.
•Because it comes out after the consumer confidence report and retail sales reports for the month, some analysts will not look as intently at the consumer credit figures month to month, instead reviewing multi-period trends once or twice a year Historical Data- “It covers revolving and non-revolving credit. Revolving credit can be increased by the consumer up to a limit without contacting the creditor (as in credit cards), while non-revolving terms are fixed at the time the loan (as with an auto loan)”( (Barnes, 2013).
The consumer credit report shows outstanding balances for commercial banks, finance companies, credit unions, Federal government and Sallie Mae, savings institutions, non-financial businesses, and securitized asset pools”(Barnes, 2013). Definition- Retail Sales “tracks the dollar value of merchandise sold within the retail trade by taking a sampling of companies engaged in the business of selling end products to consumers”(Barnes, 2008). How is the economic indicator determined?
The data released will cover the prior month’s sales, making it a timely indicator of not only the performance of this important industry (consumer expenditures generally make up about two-thirds of total gross domestic product), but of price level activity as a whole. Retail Sales is considered a coincident indicator, in that activity reflects the current state of the economy. It is also considered a vital pre-inflationary indicator, which creates the biggest interest from Wall Street watchers and the Conference Review Board, which tracks data for the Federal Reserve Board’s directors.
What it measures? “Retail sales measures “the release will contain two components: a total sales figure (and related percentage change from the previous month), and one “ex-autos”, as the large ticket price and historical seasonality of auto sales can throw off the total figure disproportionately. Companies of all sizes are used in the survey, from Wal-Mart to independent, small-town businesses”(Barnes, 2013). Strengths, weakness, problems, or criticisms Strengths (Barnes, 2013): •The retail sales data is extremely timely, and is released only two weeks after the month it covers.
•The data release is robust; investors can download a full breakout of component sectors, as well as spreadsheet historical data to examine trends. •Retail sales reports get a lot of press. It’s an indicator that is easy to understand and relates closely to the average consumer. •A revised report comes out later (two to three months on average), amending any errors. •Analysts and economists will take out volatile components to show the more underlying demand patterns. The most volatile components are autos, gas prices and food prices.
•Data is adjusted seasonally, monthly and for holiday differences month to month. Weakness (Barnes, 2013): •Revisions to the report (released about two months after the advance report) can be quite large, and the sample size is relatively small compared to the number of retailers opening their doors to consumers. •Retail sales data is often volatile from month to month, which makes trend-spotting difficult. •The indicator is based on dollars spent and does not account for inflation. This makes it difficult for individual investors to make decisions based on the raw data.
•Does not account for retail services, only physical merchandise. The U. S. is an increasingly service-based economy, so not all retail “activity” is captured. Historical Data- Retail Sales is one of the big ones – a report that can shed a lot of light on the economy. It provides detailed industry information and can really move the market. Investors will best be served by waiting for the analysts to sort through the report, removing any overly volatile components, and drawing conclusions from there. Conclusion
Economic indicators are fundamental in the health and wealth of the nation’s economy. Gross domestic product is a part of every economic indicator because it measures the size of the total economy. Six important indicators has been defined and discussed within this paper. As the economy evolves, it is important to save at the appropriate times and spend when appropriate. Keeping a watchful eye on the economic indicators, being knowledgeable about the economy, preparing for inflation as well as deflation, is necessary in order to stay ahead of an ever-changing economy.