Introduction Macroeconomics is “the study of how households and firms make decisions and how they interact in markets”(Minima, 2012, p. 29). While microeconomics is “the study of economized phenomena, including inflation, unemployment, and economic growth”(Minima, 2012, p. 29). Understanding economic indicators is an integral part of assessing the economy as a whole. Economic indicators allow the government, businesses, and consumers, alike, to analyze and predict the future status of the economy. It is important to recognize the source of changes and how they ultimately, affect the economy.
This paper will explain six economic indicators: Gross domestic product (GAP), unemployment, productivity, consumer price index (ICP), money supply, and consumer credit report. It will also explain the business cycle, why they it is utilized and show the importance through charts and graphs, Economic Indicators “Economic indicators are key statistics showing the state of the economy. These include the average workweek, weekly claims for unemployment insurance, new orders, vendor performance, stock prices, and changes in the money supply'(Friedman, 2012, p. 225).
Leading Economic Indicators Leading indicators are economic statistics that often change direction before the general economy changes. Stock market indexes are considered leading indicators, as stock indexes often decline before the economy declines and
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How is the economic indicator determined? “Productivity is a ratio of the amount of the output of the cost of the input. The greatest number of goods at the lowest possible cost is efficiency productivity'(Riggs, 2008, p. 193). What it measures? “Productivity is difficult to measure accurately. Most companies measure productivity by weighing the total output against one aspect of the input, usually the total number of labor hours required to produce the final product”(Riggs, 2008, p. 193).
It measures an economies output in an hour. Strengths, weakness, problems, or criticisms Presents the results of many complex calculations that are difficult for investors to compute on their own Productivity gives good insight into inflationary pressures, and how much GAP can grow without causing concurrent gains in inflation. Jumps n productivity tend to make their way to corporate bottom lines quickly via margin Release shows results with and without the effects of inflation expansion. Ђ Detailed productivity measures at the industry and sector level allow investors to analyze the relative productivity performance of many of their holdings. One of very few indicators that shows results compared to other advanced economies; shows how the U. S. Stacks up against the world in terms of productivity gains. Productivity results represent the lion’s share of total GAP (about 75%); only government results and nonprofit groups are removed from calculations.
Weakness (Barnes, 2013): Not a timely indicator; first report comes five weeks after the quarter, and the revised report nearly two months No new series of data is released, only derivations of previous data sets Can be very volatile quarter to quarter; long-term measurements are the most effective use of this indicator when analyzing sustainable, long-term rates of productivity growth Historical Data- Maximizing output became even more important after the Industrial Revolution because of the high costs associated with mass producing goods.
Thus, not long after the rise of stories came an outpouring of productivity and efficiency studies as well as numerous methods for getting the most possible output from a factory'(Riggs, 2008, p. 194). Major Sector Productivity and Costs sense ‘d: PRS85006092 Sector: Nonfat Business Measure: Labor productivity (output per hour) Duration: Percent change from previous quarter at annual rate Base Year: – 2007 -0. 2 2008 -2. 5 Quit 2009 2010 3. 1 Quit 3. 3 2. 4 -0. 5 Stars 5. 2 3. 2 Quit 2. 0 -3. 4 4. 8 1. 7 Annual 1. 5 0. 6 2. 9 3. 1 2012 -0. 7 1. 7 (Ibis. Gob. , 2013) -1. 0. 7 Definition- Consumer price index is (ICP) “an index compiled by the Bureau of Labor Statistics that tracks the changing price of basic goods and services in the United States”(Riggs, 2008). How is the economic indicator determined? “This figure tracks inflation (a general rise in prices) or deflation (a fall in prices). A large increase in the ICP over a short period of time represents growing inflation, and a drop in the ICP signifies deflation, both of which can be harmful to an individual’s finances and a nation’s economy'(Riggs, 2008, p. 108). What it measures? ICP measures the change in prices that consumers pay for goods and services from year to year”(Riggs, 2008, p. 108). Strengths, weakness, problems, or criticisms Gives most insight into future Fed rate moves Highly watched and analyzed in the media Good regional and industry breakdowns for investor research Weakness (Barnes, 2013): Volatile month to month Fixed ICP has certain biases (new product, substitution), which can distort results Exclusion of food and energy is only good for so long – these costs should be considered when assessing inflation Historical Data- “The United States began charting price changes in 1893.
After World War I (1914-1918) U. S. Policymakers realized that a more accurate system would be necessary to monitor the staggering allocations of the wartime and postwar economies; thus, in 1919 the Bureau of Labor Statistics began calculating the ICP, extending their research back to 1913, the year before the war started”(Riggs, 2008, p. 108).
Definition- Consumer Credit Report is (CAR) ” a monthly release from the Federal Reserve Board that estimates changes in the dollar amounts of outstanding loans to individuals, funds which are mainly used to purchase consumer goods”(Barnes, 2013). How is the economic indicator determined? “Data is collected through surveys of banks, finance companies, retail sales outfits and credit unions, among others. Each release will show the three previous months’ results, including any revisions to recent periods, if they have occurred”(Barnes, 2013).
What it measures? “Consumer credit is considered a good indicator of the potential future spending levels seen in the Personal Consumption and Retail Sales reports, and shows the extent to which benchmark interest rates such as the fed funds rate and prime rate have manifested themselves at the consumer level (it can take six months to a year for macro interest Contains detailed breakdown of auto loan figures, such as average maturity and revealing interest rates Data is provided with and without seasonal adjustments. Ђ Release shows comparisons against previous month, previous year, and also against results from the last five years Weakness (Barnes, 2013): Only total growth in outstanding loans is shown; there is no way of knowing if consumer payments have fallen off or if new loan growth has slowed based on a falling consumer credit number (and vice versa). Absence of home-equity debt provides for an incomplete picture. Ђ Because it comes out after the consumer confidence report and retail sales reports for the month, some analysts will not look s intently at the consumer credit figures month to month, instead reviewing multi- period trends once or twice a year Historical Data- “It covers revolving and non- revolving credit. Revolving credit can be increased by the consumer up Tao limit without contacting the creditor (as in credit cards), while non-revolving terms are fixed at the time the loan (as with an auto loan)”( (Barnes, 2013).
The consumer credit report shows outstanding balances for commercial banks, finance companies, credit unions, Federal government and Sallies Mae, savings institutions, non-financial genuineness, and securities asset pools”(Barnes, 2013). Definition- Retail Sales “tracks the dollar value of merchandise sold within the retail trade by taking a sampling of companies engaged in the business of selling end products to consumers”(Barnes, 2008). How is the economic indicator determined?
The data released will cover the prior month’s sales, making it a timely indicator of not only the performance of this important industry (consumer expenditures generally make up about two-thirds of total gross domestic product), but of price level activity as a whole. Retail Sales is noninsured a coincident indicator, in that activity reflects the current state of the economy. It is also considered a vital pre-inflationary indicator, which creates the biggest interest from Wall Street watchers and the Conference Review Board, which tracks data for the Federal Reserve Board’s directors.
What it measures? “Retail sales measures “the release will contain two components: a total sales figure (and related percentage change from the previous month), and one “ex-autos”, as the large ticket price and historical seasonality of auto sales can throw off the total figure disproportionately. Companies of all sizes are used in the survey, from Wall-Mart to independent, small-town businesses”(Barnes, 2013). Strengths, weakness, problems, or criticisms The retail sales data is extremely timely, and is released only two weeks after the month it covers.
The data release is robust; investors can download a full breakout of component sectors, as well as spreadsheet historical data to examine trends. Retail sales reports get a lot of press. It’s an indicator that is easy to understand and relates closely to the average consumer. A revised report comes out later (two to three months on average), amending any errors. Ђ Analysts and economists will take out volatile components to show the more underlying demand patterns. The most volatile components are autos, gas prices and food prices. Ђ Data Weakness (Barnes, 2013): Revisions to the report (released about two months after the advance report) can be quite large, and the sample size is relatively small compared to the number of retailers opening their doors to consumers. Retail sales data is often volatile from month to month, which makes trend-spotting difficult. The indicator is based on dollars spent and does not account for inflation. This makes it difficult for individual investors to make decisions based on the raw data. ЂDoes not account for retail services, only physical merchandise. The U. S. Is an increasingly service-based economy, so not all retail “activity” is captured. Historical Data- Retail Sales is one of the big ones – a report that can shed a lot of light on the economy. It provides detailed industry information and can really move the market. Investors will best be served by waiting for the analysts to sort through the report, removing any overly volatile components, and drawing conclusions from here.
Conclusion Economic indicators are fundamental in the health and wealth of the nation’s economy. Gross domestic product is a part of every economic indicator because it measures the size of the total economy. Six important indicators has been defined and discussed within this paper. As the economy evolves, it is important to save at the appropriate times and spend when appropriate. Keeping a watchful eye on the economic indicators, being knowledgeable about the economy, preparing for inflation as well as deflation, is necessary in order to stay ahead of an ever-changing economy.