What Is the Future Direction of the Economy?
To make sound financial decisions, you need to know where we are in the business cycle, how well the economy is doing, and where the economy might be headed. You can do this by paying attention to some economic statistics that are regularly reported in the news as well as on TV business shows.
Your knowledge will guide your long-term financial strategy. An economic indicator is any economic statistic, such as the unemployment rate, GDP, or the inflation rate, that suggests how well the economy is doing and how well the economy might be doing in the future.
Pro-cyclic Indicator: A pro-cyclic (or pro-cyclic) economic indicator is one that moves in the same direction as the economy. Thus if the economy is doing well, this number typically is increasing, however if we are in a recession this indicator is decreasing. The gross domestic product is an example of a pro-cyclic economic indicator. The gross domestic product (GDP) is the broadest measure of the economic health of the nation because it reports how much economic activity (all goods and services) has occurred within the borders of a country. The government regularly announces the rate at which the GDP has grown during the previous three months.
An annual rate of less than 5 percent is considered low growth; 5 percent or more is considered vigorous growth. Other examples of pro-cyclic indicators are retail sales, industrial production, and number of employees on non-agricultural payrolls.
Counter-Cyclic Indicator: a counter cyclical (or counter cyclical) economic indicator is one that moves in the opposite direction as the economy. For example, the unemployment rate is counter cyclic because it gets larger as the economy gets worse. Similarly, interest rates decline as the economy gets worse.
Leading Indicators: Leading economic indicators are those that change before the economy changes, thus they help predict how the economy will do in the future. The stock market is a leading economic indicator because it usually begins to decline before the overall economy slows down. Then the stock market advances before the economy begins to pull out of a recession. Other examples of leading economic indicators are the number of new building permits, average number of weekly initial claims for unemployment insurance, and the consumer confidence index.
A widely watched leading economic indicator is the consumer confidence index. It indicates the degree of optimism that consumers are expressing about the state of the economy. It gives a sense of consumers’ willingness to spend. Growing confidence suggests increased consumer spending.