Economic Indicators Explained: Understand the Economy

There is no denying the objective importance of interest rates, gross domestic product, existing home sales, or other indexes. The indicators reflect the cost of money, spending, investment, and the activity level of a major portion of the overall economy. Department of Commerce (DOC) during the middle of each pepperstone canada month, the retail sales report measures the total receipts, or dollar value, of all merchandise sold in stores. Sampling retailers across the country acts as a proxy of consumer spending levels. Consumer spending represents more than two-thirds of GDP, proving useful to gauge the economy’s general direction.

  1. When the federal funds rate increases, interest rates increase.
  2. Core CPI is the CPI excluding prices from energy and food-related products.
  3. Published periodically by governmental agencies or private organizations, economic indicators often have a considerable effect on stocks, employment, and international markets.
  4. Coincident indicators may be somewhat less helpful to investors, as the economic situation unfolds simultaneously.
  5. It calculates the total market value of all finished goods and services produced in a country in a given year.

This allows investors to expect and access information at predictable intervals. Economic indicators can be affected by unreliable data or changing variables. So, they should be used in conjunction with other forms of analysis. The data is compiled by various government agencies and organizations and delivered as reports.

It is an indicator that bears no relationship to the economy at all. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to ifc markets explore 20+ always-free courses and hundreds of finance templates and cheat sheets. We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.


One limitation of lagging indicators is that strategies based on them can be less timely. Policymakers, like the Federal Reserve, use CPI data as a lagging indicator to guide decisions on combating inflation. While still in use, lagging indicators may increase the risk of decisions.

What Are the Economic Indicators of a Strong Economy?

It also helps policymakers determine what they need to do to keep the economy stable or encourage it in a better direction. A command economy is an economy in which production, investment, prices, and incomes are determined centrally by a government. He espoused ig broker review that capitalism only benefits a select few and that the ruling class becomes richer by extracting value out of cheap labor provided by the working class. John Maynard Keynes developed the theory of Keynesian economics during the Great Depression.

The present state of the economy could be based on incorrect assumptions. Economic indicators are statistical measures of various economic metrics such as gross domestic product (GDP), unemployment, inflation, and consumption. The numbers provide policymakers and investors with an idea of where the economy is heading.


The component GDP that the PMI most closely relates to is the Investment component. The number of jobs created or lost in a month is an indicator of economic health and can significantly impact the securities markets. When more businesses are hiring, it suggests that businesses are performing well. More hiring can also lead to predictions that more people will have more money to spend since more of them are employed. Economic indicators serve as important barometers of an economy’s health, direction, and potential. By observing trends and interpreting various indicators, investors, businesses, and governments can make better-informed decisions.

It is one of the first indicators used to gauge the health of an economy. It represents economic production and growth, or the size of the economy. Measuring GDP can be complicated, but there are two basic ways to measure it. Successful investors, analysts, and policymakers rarely focus on a single economic indicator. They combine a range of relevant metrics to create a comprehensive picture of the economy.

The term “durable goods” refers to consumer products that usually aren’t replaced for at least a few years, such as refrigerators and cars. Near the end of each month, the Department of Commerce Census Bureau publishes its report on durable goods. Housing starts are highly sensitive to changes in mortgage rates, which are affected by shifts in interest rates. Although housing starts are a highly volatile indicator, they represent about 4% of annual GDP.

CPI is a lagging indicator, and the U.S. relies on it heavily as one of the best indicators of inflation. This is because changes in inflation can spur the Federal Reserve to make changes to its monetary policy. An increase in GDP indicates that businesses are making more money.

If you’d rather have a more hands-off approach and let a professional take these indicators into account then you may want to consider working with a financial advisor. Leading, lagging, and coincident indicators each tell a different part of the economic story. Coincident and lagging indicators provide investors with some confirmation of where the economy is and where it has been recently, giving some indication of where it might be heading. Every economist may come up with their own favorite economic indicator. For many, a country’s GDP usually represents the best overall picture of a country’s economic health.

These include government agencies, non-profit organizations, and universities. If you’re particularly interested in a specific economic indicator released monthly by the government, be aware that reports are often released on the same day of every month at the same time. Coincident indicators may be somewhat less helpful to investors, as the economic situation unfolds simultaneously. As opposed to a forecast or a prediction, a coincident indicator informs investors of what is actually happening in the present. Therefore coincident indicators may only be useful to those who can correctly interpret how economic conditions today (i.e. falling GDP) will impact future periods.

This type of economic indicator is helpful for government agencies to set public policy, as without this type of data, they would not know the direction of the economy. Therefore, while inflation and other lagging indicators are still useful to investors, they are especially critical for developing future policy responses. The Consumer Price Index (CPI), also issued by the BLS, measures the level of retail price changes, and the costs that consumers pay, and is the benchmark for measuring inflation. Using a basket that is representative of the goods and services in the economy, the CPI compares the price changes month after month and year after year. This report is an important economic indicator and its release can increase volatility in equity, fixed income, and forex markets. Greater-than-expected price increases are considered a sign of inflation, which will likely cause the underlying currency to depreciate.

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