7.3 Economic Indicators & their Relevance
Every week dozens of economic surveys and indicators get released. In the past, experienced professionals and economists had the advantage of receiving this data in an exclusive fashion. Fortunately, the emergence of the internet has changed this situation by giving everyone access to such data. Economic indicators can have a huge impact on the market. Therefore, knowing how to interpret and analyse them is important for all investors. In this session we will cover some of the most important economic indicators. See what they can tell you about the health of the economy - and your investments.
An economic indicator is simply any economic statistic, such as the unemployment rate, GDP or the inflation rate, which indicates how well the economy is doing and how well the economy is going to do in the future. Economic indicators allow analysis of economic performance and predictions of future performance. One of the applications of economic indicators is the study of the economic cycle.
Economic indicators include various indices, earnings reports, and economic summaries. Examples: unemployment rate, housing statistics, wholesale price index (a measure for inflation), industrial production, bankruptcies, gross domestic product, broadband internet penetration, retail sales, stock market prices, money supply changes etc. If a set of economic indicators suggest that the economy is going to do better or worse in the future than previously expected, investors may decide to change their strategy.
Economic indicators can have one of three different relationships to the economy:
- Relation to the economic cycle:
- Procyclic: A procyclic (or procyclical) economic indicator is one that moves in the same direction as the economy. So if the economy is doing well this number usually increases whereas if we are in a recession this indicator decreases. The gross domestic product (GDP) is an example of a procyclic economic indicator.
- Counter Cyclic: A counter cyclic (or counter cyclical) economic indicator is one that moves in the opposite direction as the economy. The unemployment rate gets larger as the economy gets worse and so it is a counter cyclic economic indicator.
- Acyclic: An acyclic economic indicator is one that has no relation to the health of the economy and is generally of little use. For example, an oil exploration company has found new reserves in the allocated block whereby the company’s prospects increases. This has no relationship to the health of the economy and so we could say it is an acyclic economic indicator.
- Frequency Of The Data:
In most countries GDP figures are released quarterly (every three months) while the unemployment rate is released monthly. Some economic indicators such as the Sensex or Nifty are available immediately and change every minute.
Economic indicators can be leading, lagging, or coincident which indicates the timing of their changes relative to how the economy as a whole is changing. Economic indicators can be classified into three categories according to their usual timing in relation to the business cycle:
- Leading indicators are indicators that usually change before the economy as a whole changes. They are therefore useful as short-term predictors of the economy. Stock market returns are a leading indicator: the stock market usually begins to decline before the economy as a whole declines and usually begins to improve before the general economy begins to recover from a slump.
- Lagging indicators are indicators that usually change after the economy as a whole does. Typically the lag is a few quarters of a year. The unemployment rate is a lagging indicator: employment tends to increase two or three quarters after an upturn in the general economy.
- Coincident indicators are those which change at approximately the same time as the whole economy, thereby providing information about the current state of the economy. Personal income, GDP, industrial production and retail sales are coincident indicators. A coincident index may be used to identify, after the fact, the dates of peaks and troughs in the business cycle.
In short, when you analyse economic indicators you have to consider them based in relation to economic cycle, the frequency of data and its timings.