Economic indicator: definition and how to use it
|What are the economic Indicators?|
|Types of economic indicators|
|How economic indicators impact the markets|
|What are the key economic indicators|
|Where can we find the economic indicators?|
A strong economy is one of the pillars of a successful nation. Whilst it isn't the only factor, it kickstarts a whole range of positive repercussions for that country. This includes job creation, high employment levels, international investment and a strong and well-respected currency. However, there needs to be a cocktail of factors that set the bedrock for this activity to flourish. Today we'll look at the indicators that signal both a strong and weak economy.
What are the economic indicators?
A handful of dominant indicators signal the state of an economy or the projected movement within that country's economy. While there can be other smaller factors, the main four economic indicators are:
- Amount of house sales and general house prices
- Gross Domestic Product (GDP)
- Interest rates
- Government policy
However, other factors, such as unemployment rates and commodity prices, such as oil and gas, are also included. Economists, analysts and key policymakers will also factor these variables into effective and respected research.
Types of economic indicators
Market analysts, traders and economists look for three economic indicators. They are:
- Leading indicators
- Lagging indicators
- Coincident indicators.
How economic indicators impact the markets
Economic indicators have an enormous impact on the markets. Government policy and interest rate increases and decreases can see seismic shifts in the market to hundreds of billions of dollars. For example, a sharp decline in house prices can indicate that a country could be heading towards a recession. It could also indicate underlying factors are causing the market to retract, such as declining international investment or the rise of natural materials causing the process to become more expensive.
These two examples would be examples of lagging indicators and are both pretty clear negative indicators. Leading indicators would work oppositely, such as stronger than predicted GDP growth or government policy which signals bullish intent.
The final example, coincident indicators, revolve around gathering information and data to establish the sentiment of the immediate economic period that preceded it. This can range from several weeks to several months. Using coincident indicators as factors to drive policy isn't recommended, as data collection takes time.
The information isn't as readily available as it is with lagging or leading indicators. Some analysts argue that for this reason, it shouldn't carry as much weight as the other two indicators. Economists and key figures instrumental in government policy use these indicators to pick up on economic trends and better understand where the economy is headed. Therefore, they are considered a crucial set of data but not integral for policy.
What are the key economic indicators
As discussed earlier in the article, four main defining indicators tend to direct the economy positively or negatively. Out of the four we mentioned, it would be difficult to boil it down to just one or two. For example, GDP (Gross Domestic Product) is considered an extremely strong indicator of whether a country is heading for a recession, stagnation or high levels of growth.
Interest rates are another key indicator as they can encourage people to spend more money or save. A rise in interest rates makes it less cost-effective to borrow money. The best example is that mortgage rates will rise and discourage people from spending. The same applies to other types of lending, such as loans.
Conversely, lowering interest rates encourages people to spend money on items such as houses and cars, as it is easier to borrow money. In this scenario, the key aim is to stimulate growth. This also has an additional effect on investments as people have more disposable income. If you're looking to invest, mobile trading apps like amana can provide a seamless service that allows you to invest while on the move.
Government policy is another indicator that can either stimulate an economy or cause it to retract. Whilst it is never the government's intention to slow down economic growth, it is a fine balancing act to ensure that the country, as a whole, remains on a steady course.
If a government announced it would begin printing money, for example, this could lead to a weakened currency and less purchasing power abroad. This could potentially harm the economy, fueling higher-than-expected inflation levels.
Finally, the housing market is one of the main markets discussed in mainstream economics. For most of us, a house is the largest purchase we will make in our lifetime. If an economy is in good shape, there will be greater demand for housing. This is for a variety of reasons. If an economy is in good shape, the currency is strong, employment is high, and interest rates are low. These are all ingredients for a healthy buyer's market. Many people will look to take advantage of these variables and get on the property ladder.
Much criticism has been levelled regarding house prices as a solid economic indicator. The reason for this is partly because of the 2008 financial crash. Despite house prices looking solid across the US and Europe, they were built on a toxic potion of unaffordable debt.
The house price figures were a bubble waiting to burst, and they caused a huge retraction, resulting in serious economic problems for millions of people. Generally speaking, though, a strong housing market means a strong economy.
Where can we find the economic indicators?
Information regarding interest rates is widely available for the majority of countries that publish the statistics. Any movement in interest rates is usually covered by media outlets and extensively in business news. The same applies to government policy, which usually takes front and center in the news, especially if it causes a significant shift in the trajectory of the economic landscape.
GDP figures are published every year, and they are comprised of many different pieces of information. Again, this information is discussed in detail in the media or social media platforms. Significant shifts in the housing market or house prices are also covered in considerable detail on a number of news platforms.