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 regularly reported in the news and 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 inflation rate, that suggests how well the economy is doing and how well the economy might be doing in the future.
Classification of Economic Indicators
Economic indicators could be categorized based on time and Correlation. Let’s understand them.
Economic Indicators based on Timing
Based on Timing, economic indicators can be leading, lagging, or coincident, indicating the Timing of their changes relative to how the economy changes.
- Leading Indicators
- Coincident Indicators
- Lagging Indicators
Leading Indicators are economic indicators that tend to change before the general economic activity and may sometimes be used as a predictor.
- Stock prices
- Average work hours in the manufacturing sector
- Housing market
- Interest rates
Coincident Indicators are the indicators that occur in simultaneous-occurring activity in an economy.
- Personal income minus transfer payments,
- An overall change in GDP
A lagging Indicator is the one that trails behind the general economic activity.
- Unemployment rate
- Percentage change in CPI
The time difference between the indicator and the economic activity is called ‘lead time’ or ‘lag time.’
Economic Indicators based on Direction
Economic Indicators exhibit one of three different relationships to the economy. The three relationships are shown below:
A pro-cyclic (or pro-cyclical) economic indicator moves in the same direction as the economy. So, if the economy performs well, this number usually increases, whereas, in recession, this s indicator decreases. The Gross Domestic Product (GDP) is an example of a Pro-Cyclic economic indicator.
Counter Cyclic Indicator
A Counter Cyclic (or countercyclical) economic indicator moves with the economy’s direction. For example, the unemployment rate gets more prominent as the economy worsens, so it is a Counter Cyclic economic indicator.
An Acyclic economic indicator bears no relation to the economy’s health and is generally of little use.
How To Use Economic Indicators To Understand The Market & Predict Future Trends?
Here we will discuss the economic indicators that can be used to understand the market and predict future trends.
- The first one is price inflation, which is measured by the Consumer Price Index (CPI), which measures changes in the prices of goods and services purchased by households.
- The second one is the unemployment rate, which shows how many people work for a given period, usually about 12 months.
- The third one is gross domestic product (GDP), which shows what countries have produced in terms of total value added or output over a given period.
All these three are important economic indicators that can be used to understand market trends and predict future trends.
How Do Economic Indicators Affect the Stock Market?
The economy is one of the most important sources of influence on the stock market, and it is crucial to understand how these indicators affect it.
The economic indicators have a significant impact on stock market movements and are very difficult to predict.
We can use economic indicators like GDP, inflation rate, and unemployment data to determine if the stock market will go up or down in the future.
Conclusion: The Importance of Economic Indicators in Our Life
The economy is one of the most critical sectors in today’s world. It affects all aspects of our lives and dramatically impacts our lives. The economy is affected by many factors, such as its growth rate, inflation rate, unemployment rate, and other economic indicators. These indicators are used to determine whether the economy is healthy or not. But other factors that affect the economy, like natural disasters, wars, politics, etc., can also impact it.
The most important economic indicator for us today is GDP which measures how much money we generate yearly through production and consumption (Gross Domestic Product). This is one of the best ways to measure an economy’s performance because it uses a straightforward formula to calculate the total economic production.