Economic Indicators

People often talk about the economy in terms of whether it is good or bad. But, how do we measure something as big and complex as the American economy?

One way is by tracking Gross Domestic Product (GDP). As the name implies, Gross Domestic Product measures the total output of a nation's economy. It is an estimate of the total value of all goods and services produced and purchased over a three-month period. If the GDP number comes in at 3%, that means the economy grew at an annual rate of 3% over the financial quarter. If GDP is - 2%, the economy is shrinking at an annual rate of - 2%. The GDP numbers that are factored for inflation are called "real GDP."

The Federal Reserve Board monitors many economic indicators to determine whether inflation is threatening the economy, or whether the Fed needs to provide stimulus to a sagging economy. The following employment indicators reveal how many people are working and how much compensation they're receiving. If people are not working, that signals an economic slowdown, and the Fed might lend a hand by lowering interest rates. If too many people are working, that signals inflation, and the Fed might cool things down by raising interest rates.

• Average Weekly New Claims for Unemployment Insurance: if people are showing up for unemployment insurance at a higher rate that is negative. If the number of new claims drops, that means economic activity is picking up positive.

• Unemployment Rate (Non-farm Payroll): also called "payroll employment." Includes full-time and part-time workers, whether they are permanent or temporary employees. Tracks how many people are working in the private sector. Released monthly. Called "non-farm" because it does not measure seasonal agricultural jobs.

• Employment Cost Index (ECI): measures the growth of wages and benefits (compensation). Quarterly figure.

A leading indicator shows up before something happens and is used to predict.
A coincident indicator tells us where we are now,
A lagging indicator gives us data about where we have just been, confirming a trend.

Leading (predict changes in the economy):
•    the average weekly hours worked by manufacturing workers
•    the average number of initial applications for unemployment insurance
•    the amount of manufacturers' new orders for consumer goods and materials
•    the speed of delivery of new merchandise to vendors from suppliers
•    the amount of new orders for capital goods (equipment used to make prod¬ucts) unrelated to defense
•    the amount of new building permits for residential buildings
•    the S&P 500 stock index
•    the inflation-adjusted monetary supply (M2)
•    the spread between long and short interest rates
•    consumer confidence
•    bond yields

Coincident (current state of the economy):

•    the number of employees on non-agricultural payrolls
•    industrial production
•    manufacturing and trade sales
•    personal income levels

Lagging (confirm trends, do not predict):
•    the value of outstanding commercial and industrial loans
•    the change in the Consumer Price Index for services from the previous month
•    the change in labor cost per unit of labor output
•    inventories
•    the ratio of consumer credit outstanding to personal income
•    the average prime rate charged by banks
•    length/duration of unemployment

The table above shows what the main indicators tend to reveal to an economist. For example, if the S&P 500 is up, that means the economy could be headed for an expansion, and when the S&P 500 is down, the economy could be headed for a contraction. The "Fed" typically intervenes to smooth out the rough patches in the economy, so if they see inflationary signals, they start raising interest rates. If they see deflationary signals, they provide economic stimulus by lowering interest rates.


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