Economic indicator

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Indices derived from data collected over long periods of time that represent business conditions and general economic activity. These indices may be maintained by government sources or private commercial groups. The consumer price index, unemployment rate, gross national product, and Dow Jones Industrial Average are all types of economic indicators. Marketers use any number of different economic indicators in planning marketing strategies as a means to project demand for a particular product or service.

The indexes of leading economic indicators are statistical measures applied to evaluate the performance of the American economy. Also known as "business indicators," they are used to analyze business and economic trends with the aim of predicting, anticipating, and adjusting to the future. The index is made up of three composite indexes of economic activity that change in advance of the economy as a whole. The index is thus capable of forecasting economic downturns as much as 8 to 20 months in advance, and economic recoveries from between 1 and 10 months in advance. The economic indicators are not foolproof, however, and have on occasion suggested the opposite of what actually came to pass.

The Historical Background

In one form or another, economic indicators, however crude, have been in use since World War I. Until the Great Depression of the 1930s, economists devoted little effort to measuring and predicting economic trends, other than perhaps to compile statistical information on annual employment. With the onset of the depression, the importance of economic indicators grew, as the crisis made evident the need for businessmen and politicians to have detailed knowledge of the economy. As a result of the depression, business and government alike clamored for a more accurate measurement of economic performance.

A group of economists at Rutgers University in New Brunswick, New Jersey, developed the first official national economic indicators in 1948. Since then, the indicators have evolved into the composite index of economic indicators in use as of the early 2000s. The list of economic indicators was first published by the U.S. Department of Commerce, Bureau of Economic Analysis (BEA). Overall, the department has a noteworthy record: since 1948 the BEA has accurately predicted every downturn and upswing in the American economy.

Although economists are divided on the value of the index in predicting trends, businesspeople and the American public consider it the leading gauge of economic performance. Although the list of economic indicators has been revised many times to reflect the changes in the American economy, within a few years of its inception reporters began regularly citing information from the index in their writing about the American economy. In an effort to improve the accuracy of reporting on the economy, the BEA began issuing explanatory press releases during the 1970s. Considered crude gauges compared to the more complicated econometric models that have since been developed, the indexes of the BEA are still referred to by economists, the business community, and others interested in economic conditions and tendencies in the United States.

The Evolution of the Economic Indicator Index

After years of analyzing business cycles, the National Bureau of Economic Research created a number of indicators to measure economic activity, categorized into three general composite indexes. The first group is known as the leading indicators because its numbers change months in advance of a transformation in the general level of economic activity. The National Bureau of Economic Re-search uses ten leading economic indicators, which represent a broad spectrum of economic activity. These indicators include the average number of weekly hours of workers in manufacturing, the average initial weekly claims for unemployment insurance and state programs, new orders for manufacturers of consumer goods that have been adjusted for inflation, vendor performance, manufacturers' new orders for nondefense capital goods also adjusted for inflation, and new private housing units that indicate the future volume of the housing market and construction. Included also are the stock prices of 500 common stocks based on Standard and Poor's 500 Index, the M-2 money supply, which consists of all cash, checking, and savings deposits, interest rates along with ten-year Treasury bonds, and consumer expectations as researched by the University of Michigan.

Using this cluster of indicators, the Bureau predicts the national economic performance in the coming months based on a "diffusion index," or DI. The DI number at any given time is the percentage of the ten leading indicators that have risen since the previous calculation. A DI number greater than fifty indicates an expanding economy; the larger the DI number, the stronger the basis for predicting economic growth.

The remaining two indexes that are also consulted include the composite index of coincident indicators and the lagging index. The composite index of coincident indicators measures the current economy based on the number of employees on nonagricultural payrolls, personal income, industrial production, and manufacturing and trade sales. This index moves more in line with the overall economy. The lagging index does not react until a change has already occurred in the economy. This index consists of the average duration of unemployment, the ratio of manufacturing and trade inventories to sales, changes in the index of labor costs per unit of output, the average prime rate, outstanding commercial and industrial loans, the ratio of outstanding consumer installment credit to personal income, and any changes in the Consumer Price Index. Economists generally believe that lagging indicators are useless for prediction. The value of construction completed, for example, is an outdated indicator, for the main economic effect of the construction occurred earlier when the plans were made and construction actually carried out.

Other Economic Indicators

In addition to the composite indexes, there are other indicators that economists use to study the American economy. The Survey of Current Business, published by the U.S. Department of Commerce, is a quarterly volume addressing national production and the patterns of economic fluctuation and growth. The monthly Federal Reserve Bulletin provides measures of the national productive activity based on data from 207 industries. Also included are separate production indexes for three market groups: consumer goods, equipment, and materials, and for three industry groups, manufacturing, mining, and utilities.

Detailed statistics on the state of labor in the United States are contained in the Monthly Labor Review, which is published by the U.S. Bureau of Labor Statistics. Analysts and policymakers use the indicators of population, labor force size, and the number of employed workers to interpret the growth of national productive capacity. The index also provides the number and percentage of unemployed workers, the average number of hours worked, and the average earnings, all of which prove invaluable during periods of recession.

Other economic indicators include the monthly Consumer Price Index, which measures the general price level and prices charged by certain industries. Stock price averages are also evaluated. These consist of the four Dow Jones averages, which are calculated from the trading prices of 30 industrial stocks, 20 transportation stocks, 15 utility stocks, and a composite average of 65 other stocks. The Standard and Poor's composite index of 500 stocks serves as a leading economic indicator, as do the stocks traded on the New York Stock Exchange. The Federal Reserve supplies the additional indicators of money and credit conditions in the United States, covering the money supply, the amount of currency in circulation, checking account deposits, outstanding credit, interest rates, and bank reserves.

The Effectiveness of Economic Indicators

Over time, economic indicators have greatly increased the level of sophistication in economic forecasting and the analysis of business performance. The usefulness of these indicators, however, depends as much on the user's knowledge of their limitations as on the indicators themselves. Indicators provide only averages, and as such record past performance. As some economists have pointed out, applying indicators to predict future developments requires an understanding that history never repeats itself exactly.

Skeptical economists have warned that each new release of the leading economic indicators can trigger an unwarranted reaction in the stock and bond markets. They believe that the so-called flash statistics, as the monthly release of the leading economic indicators is known, are almost worthless. In many cases, the indicator figures are revised substantially for weeks and months after their initial release, as more information becomes available. As a result, the first readings of the economy that these indicators provide are unreliable.

One oft-cited example is the abandonment of the stock market that occurred during the final weeks of 1984. Initial statistics based on the leading indicators showed that the economy was slowing down; the Gross National Product (GNP) was predicted to rise only 1.5 percent. Further, statistics pointed to a worse showing for the following year. Certain that a recession was imminent, investors bailed out of the stock market in late December. In the following months, revised figures showed that the GNP had actually gained 3.5 percent, almost triple the initial prediction, an announcement that sent the stock market soaring.

The impact of current events can also play an important and unpredictable role in determining the leading economic indicators. In the aftermath of the terrorist attacks on New York and Washington, D.C., which took place on 11 September 2001, the leading indicators showed an unemployment rate of 5.4 percent, the biggest increase in twenty years. Included in that were 415,000 agricultural jobs that were lost during September, which was double the number analysts expected. The jobless rate also included 88,000 jobs lost in the airline and hotel industries, as well as 107,000 temporary jobs in the service sector. An additional 220,000 jobs were lost in unrelated businesses, pointing to an economy in distress.

Bibliography

Carnes, W. Stansbury, and Stephen D. Slifer. The Atlas of Economic Indicators: A Visual Guide to Market Forces and the Federal Reserve. New York: Harper Business, 1991.

Dreman, David. "Dangerous to your investment health; here are some good reasons you should stay clear of 'flash' economic indicators." Forbes 135 (April 8, 1985): 186–187.

The Economist Guide to Economic Indicators: Making Sense of Economics. New York: John Wiley & Sons, 1997.

Lahiri, Kajal, and Geoffrey H. Moore, eds. Leading Economic Indicators: New Approaches and Forecasting Records. New York: Cambridge University Press, 1991.

"Lengthening shadows; The economy." The Economist (November 10, 2001): n. p.

Rogers, R. Mark. Handbook of Key Economic Indicators. New York: McGraw-Hill, 1998.

—Meg Greene Malvasi

Series of statistical figures, such as the consumer price index or the gross domestic product, used by economists to predict future economic activity.

A subindex that measures overall consumer sentiments toward the present economic situation and is used to derive (about 40% of) the Consumer Confidence Index, a widely used economic indicator.  The sub-index is compiled from data gathered from a survey of 5,000 households on questions regarding current business and employment conditions. Also known as "Current Situation Index".

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We look at this closely watched economic indicator to see what it means and how it's calculated. Understanding The Consumer Confidence Index
It's the key to any market economy, so investors need to learn the measures and how to analyze them. Consumer Confidence: A Killer Statistic

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An economic indicator (or business indicator) is a statistic about the economy. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles.

Economic indicators include various indices, earnings reports, and economic summaries. Examples: unemployment rate, quits rate, housing starts, Consumer Price Index (a measure for inflation), Consumer Leverage Ratio, industrial production, bankruptcies, Gross Domestic Product, broadband internet penetration, retail sales, stock market prices, money supply changes.

The leading business cycle dating committee in the United States of America is the National Bureau of Economic Research (private). The Bureau of Labor Statistics is the principal fact-finding agency for the U.S. government in the field of labor economics and statistics. Other producers of economic indicators includes the United States Census Bureau and United States Bureau of Economic Analysis.

Contents 1 Classification by timing 1.1 Leading indicators 1.2 Lagging indicators 1.3 Coincident indicators 2 By direction 3 Local indicators 4 See also 5 References 6 External links

Classification by timing

Economic indicators can be classified into three categories according to their usual timing in relation to the business cycle: leading indicators, lagging indicators, and coincident indicators.

Leading indicators

Leading indicators are indicators that usually change before the economy as a whole changes.^[1] 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. Other leading indicators include the index of consumer expectations, building permits, and the money supply.^{[citation needed]} The Conference Board publishes a composite Leading Economic Index consisting of ten indicators designed to predict activity in the U. S. economy six to nine months in future.

The 10 Components of Leading Indicators

1. Average weekly hours (manufacturing) — Adjustments to the working hours of existing employees are usually made in advance of new hires or layoffs, which is why the measure of average weekly hours is a leading indicator for changes in unemployment.
2. Average weekly jobless claims for unemployment insurance — The CB reverses the value of this component from positive to negative because a positive reading indicates a loss in jobs. The initial jobless-claims data is more sensitive to business conditions than other measures of unemployment, and as such leads the monthly unemployment data released by the U.S. Department of Labor.
3. Manufacturers' new orders for consumer goods/materials — This component is considered a leading indicator because increases in new orders for consumer goods and materials usually mean positive changes in actual production. The new orders decrease inventory and contribute to unfilled orders, a precursor to future revenue.
4. Vendor performance (slower deliveries diffusion index) — This component measures the time it takes to deliver orders to industrial companies. Vendor performance leads the business cycle because an increase in delivery time can indicate rising demand for manufacturing supplies. Vendor performance is measured by a monthly survey from the National Association of Purchasing Managers (NAPM). This diffusion index measures one-half of the respondents reporting no change and all respondents reporting slower deliveries.
5. Manufacturers' new orders for non-defense capital goods — As stated above, new orders lead the business cycle because increases in orders usually mean positive changes in actual production and perhaps rising demand. This measure is the producer's counterpart of new orders for consumer goods/materials component (#3).
6. Building permits for new private housing units.
7. The Standard & Poor's 500 stock index — The S&P 500 is considered a leading indicator because changes in stock prices reflect investor's expectations for the future of the economy and interest rates.
8. Money Supply (M2) — The money supply measures demand deposits, traveler's checks, savings deposits, currency, money market accounts, and small-denomination time deposits. Here, M2 is adjusted for inflation by means of the deflator published by the federal government in the GDP report. Bank lending, a factor contributing to account deposits, usually declines when inflation increases faster than the money supply, which can make economic expansion more difficult. Thus, an increase in demand deposits will indicate expectations that inflation will rise, resulting in a decrease in bank lending and an increase in savings.
9. Interest rate spread (10-year Treasury vs. Federal Funds target) — The interest rate spread is often referred to as the yield curve and implies the expected direction of short-, medium- and long-term interest rates. Changes in the yield curve have been the most accurate predictors of downturns in the economic cycle. This is particularly true when the curve becomes inverted, that is, when the longer-term returns are expected to be less than the short rates.
10. Index of consumer expectations — This is the only component of the leading indicators that is based solely on expectations. This component leads the business cycle because consumer expectations can indicate future consumer spending or tightening. The data for this component comes from the University of Michigan's Survey Research Center, and is released once a month.

Lagging indicators

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^{[citation needed]}. In finance, Bollinger bands are one of various lagging indicators in frequent use. In a performance measuring system, profit earned by a business is a lagging indicator as it reflects a historical performance; similarly, improved customer satisfaction is the result of initiatives taken in the past.^{[citation needed]}

The Index of Lagging Indicators is published monthly by The Conference Board, a non-governmental organization, which determines the value of the index from seven economic variables. These components tend to follow changes in the overall economy.

The components are:

• The average duration of unemployment (inverted)
• The value of outstanding commercial and industrial loans
• The change in the Consumer Price Index for services
• The change in labour cost per unit of output
• The ratio of manufacturing and trade inventories to sales
• The ratio of consumer credit outstanding to personal income
• The average prime rate charged by banks

Coincident indicators

Coincident indicators change at approximately the same time as the whole economy, thereby providing information about the current state of the economy. There are many coincident economic indicators, such as Gross Domestic Product, industrial production, personal income and retail sales. A coincident index may be used to identify, after the fact, the dates of peaks and troughs in the business cycle.^[2]

There are four economic statistics comprising the Index of Coincident Economic Indicators:^{[citation needed]}

• Number of employees on non-agricultural payrolls
• Personal income less transfer payments
• Industrial production
• Manufacturing and trade sale

The Philadelphia Federal Reserve produces state-level coincident indexes based on 4 state-level variables:^[3]

• Nonfarm payroll employment
• Average hours worked in manufacturing
• Unemployment rate
• Wage and salary disbursements deflated by the consumer price index (U.S. city average)

By direction

There are also three terms that describe an economic indicator's direction relative to the direction of the general economy:

• Procyclic indicators move in the same direction as the general economy: they increase when the economy is doing well; decrease when it is doing badly. Gross domestic product (GDP) is a procyclic indicator.
• Countercyclic indicators move in the opposite direction to the general economy. The unemployment rate is countercyclic: it rises when the economy is deteriorating.
• Acyclic indicators are those with little or no correlation to the business cycle: they may rise or fall when the general economy is doing well, and may rise or fall when it is not doing well.^[4]

Local indicators

Local governments often need to project future tax revenues. The city of San Francisco, for example, uses the price of a one-bedroom apartment on Craigslist, weekend subway ridership numbers, parking garage usage, and monthly reports on passenger landings at the city's airport.^[5]

See also

Business and economics portal

• Big Mac Index
• Bureau of Labor Statistics
• CAPRI model
• Consumer Confidence Index
• Consumer Leverage Ratio
• Consumer price index
• Core inflation
• Economic calendar
• Economic data
• Fundamental analysis
• Genuine Progress Index
• Gross domestic product
• Hemline index
• Inflation
• Lipstick effect
• List of economic reports by U.S. government agencies
• Misery index (economics)
• SET Index
• The Conference Board

References

1. ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 314. 
2. ^ Charles Emrys Smith, 'Economic Indicators,' in Wankel, c. (ed.) Encyclopedia of business in Today's World, California, USA, 2009.
3. ^ "State Coincident Indexes". Federal Reserve Bank of Philadelphia. http://www.philadelphiafed.org/research-and-data/regional-economy/indexes/coincident/. Retrieved 4 October 2010. 
4. ^ About.com, A Beginner's Guide to Economic Indicators, retrieved November 209. This was the source of "procyclic," "acyclic," etc., as well as confirmation of "leading," "lagging," etc., and the source of some of the examples.
5. ^ "A Fresh Approach To Measuring The Economy". 2010-04-11. http://www.npr.org/templates/story/story.php?storyId=125837367. Retrieved 2010-04-20. 

External links

• U.S. Bureau of Labor Statistics
• The Conference Board - Economic Indicators
• FED101 - Economic Indicators
• International Conference on Indicators and Survey Methodology
• U.S. Economic Indicators
• About Economic Indicators

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