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What are the key economic indicators of a country? How do you determine if the government is doing well or not? Certain factors cumulatively establish the country’s worth, like its mortality rate, life expectancy, and education, but the most common remains its economic indicators. Economic indicators of a country, on numerous occasions, become the countenance of how well a government is doing.
What are Economic Indicators?
Economic indicators are the reports released by government agencies, N.P.O.s, and private organizations. These reports provide a statistical evaluation of a country’s economic health. These indicators account for several factors like the total production of goods and services in a financial year, current business cycles, consumers’ and producers’ behavior, and more. Fundamental economic indicators may be released daily, weekly, or monthly, but the major ones have fixed quarterly or annual cycles.
Exchange rate values are correlated with fundamental analysis.
Exchange rates can indicate economic health by showing the relative strength of different nations’ currencies. Knowing the value of the home currency with foreign currencies helps investors analyze investments. Exchange rates capture a lot of economic factors and variables and can fluctuate for various reasons.
Before discussing the major economic reports, one must remember that we are not solely talking about money when we are these economic indicators. These indicators are massive and play a key role in various independent studies and analyses.
The Top 10 Leading Economic Indicators
What are the best indicators of a thriving economy? G.D.P. growth is the most important economic indicator of a flourishing economy. Of course, Industrial production, retail, etc., everything is connected, and G.D.P. growth usually means the growth of several important economic indicators. Real G.D.P. is adjusted for inflation, while nominal G.D.P. is not. The three most important economic indicators are C.P.I., G.D.P., and Unemployment.
Key economic indicators for a country
What are leading economic indicators?
Leading Economic Indicators are Real Gross Domestic Product (G.D.P.), Consumer Price Index (C.P.I.), U.S. Non-farm Payrolls (N.F.P.) Data – Current Employment Statistics (C.E.S.), Retail Sales, Producer Price Index (PPI), Consumer Confidence Survey, Money Supply (M2), Housing Starts, Manufacturing and Trade Inventories and Sales.
What are the leading economic indicators supposed to predict?
Leading economic indicators are supposed to predict the activity and health of the economy. Additionally, economic indicators can be used to predict the ups and downs of the economy in the future.
As we have mentioned earlier, numerous economic reports are published every year. Some of these reports are easy to understand, but if you study them with the outlook of trade or investment, we advise you to take an expert opinion. The data in these reports are susceptible, and even the slightest change can have a ricocheting effect. The current economic indicators are exact, but you should still not isolate one financial report and judge the country on its basis. However, you are not required to read all of them. So what are the ten most important economic indicators, and how can you use them?
It is essential to identify economic indicators by the importance, so the recommendation is always to look: C.P.I., G.D.P., and Unemployment and then all other indicators.
Real Gross Domestic Product (G.D.P.)
Define Real Gross Domestic Product
Gross Domestic Product or G.D.P. is the total value of all the final goods and services produced in a country in one financial year. Economists consider two types of G.D.P.s: real G.D.P. and the other is called Nominal G.D.P. The significant difference is that inflation is adjusted when talking about Real G.D.P. This is because it takes into account the change in year-to-year prices.
Here, the wealthy society’s social depends on how fast the profits might grow and the expected return on capital. The HDI considers it a narrower approach as it calculates the economy’s health against the monetary increase or decreases only.
Real G.D.P. importance:
The Real G.D.P. provides some data that helps the central or federal banks adjust their monetary policies.
How to find a Real gross domestic product?
To find Real Gross Domestic Product, you need to divide the nominal G.D.P. by the G.D.P. deflator (R). For example, deflator R equals 1.02 in an economy where prices have increased by 2% since the base year. If nominal GDP was $100 million, then real GDP is calculated as $100,000,000 / 1.02, or $98,039,215.
From where can you get the data?
You can read the data on various government sites. For example, in the U.S.A., the report is issued by the Department of Commerce’s Bureau of Economic Analysis. You can view it at www.bea.gov. It is released quarterly after revisions are made. The data has ‘advance estimates,’ ‘preliminary estimates,’ and the ‘final numbers.’ Along with the data, the reasons for the increase or the decrease in G.D.P. are also explained.
Consumer Price Index (C.P.I.)
What is the Consumer price index (C.P.I.)
The consumer price index is based on consumers’ relationships and purchasing power. It notes the average price level fluctuation in the goods and services purchased by urban households in a month. It focuses on the cost of living. The change in the level of money spent on products and services helps determine the inflation rate.
When the consumer price index rises, the typical family has to spend more dollars on maintaining the same standard of living. When the consumer price index falls, the typical family has to spend more dollars on maintaining the same standard of living.
C.P.I. is based on averages; it will not consider every item an individual will buy and collect information about several goods and services spread in over 200 item categories. This data can be collected virtually or by visiting urban areas. As the data focuses on the expenditure on consumable products and services, it excludes income, investments in bonds, life insurance or stocks, and Social Security taxes. However, the sales tax is included in the data as it is paid directly by the consumer.
Its importance?
C.P.I. is one of the best economic indicators used to understand the level of inflation prevailing in a country. Financial economists closely read it, who make assumptions about how the economy may move by utilizing this data. Changes in the inflation level alert the Federal Bank that it is time to change the monetary policy.
The report is particular, and you can find it on www.bls.gov/cpi/home.htm.
U.S. Nonfarm Payrolls (N.F.P.) Data – Current Employment Statistics (C.E.S.)
Non-Farm Payroll or N.F.P. represents the change in people employed outside the agricultural sector (industry, public sector, services, etc.). An increase in employees could strengthen the currency, while a decline could weaken it. Why is the agricultural industry not included in the report? We will answer immediately! Weather conditions and seasonal changes (primarily) affect the farm sector, while other sectors are more strongly related to their economic needs. That is why the report is called Non-Farms Payrolls. Non-farm payroll dates you can analyze on our website.
What is Current Employment Statistics?
As the name suggests, C.E.S. is related to employment and earnings across non-agricultural industries like civil government workers. It talks about the current situation rather than in the past. It is a survey conducted every month by the Bureau of Labor Statistics to know about employment, wages, unemployment, working hours, and earnings based on the company payroll. It has a broader approach as the research is disseminated in many ways, including employment/unemployment rates among genders and ethnic groups.
The survey is based on the information gathered from 300,000 establishments across 600 industries. This is approximately one-third of the total employees who belong to the formal sector. The survey relies on hours of working. Therefore, when we talk about employed personnel, we consider both full-time and part-time employees who receive a certain income for hours they have worked for. Even the employees on paid vacations and sick leaves are included in this survey. However, it does not include unpaid family members, volunteers, self-employed people. In other words, a person will be covered in this survey if they are on a company’s payroll.
Its importance?
C.E.S. is deemed prominent when discussing solid economic indicators as it is the earliest report released every month. Economists pay special attention to C.E.S. as it tells about the employment and wage trend in the non-agriculture sector. It talks about how many jobs have been lost or gained that month and how many people have earned above the minimum wage.
The trends derived from the payroll data are also interesting. You can get to know how many hours have people worked on average and how they were compensated on an hour. Important to understand these trends as they tell the authorities about wage inflation.
From where can you get the data?
You can get the data from www.bls.gov/ces/home.htm. It is shared by the Department of Labor’s Bureau of Labor Statistics in the U.S.
Retail Sales
Retail sales in the reports show changes in the volume of sales in retail stores every month. It is published two weeks after the reference month (data from the last month). The U.S. Department of Commerce issues it. Retail volume is one indicator of consumer consumption, so as an indicator of consumer demand and consumer confidence, it can serve as a guide for currency markets. This indicator is divided into: “car sales” and “sales of everything else.” Since the number of vehicles is a very volatile value, more accurate information is provided by the part of the indicator that does not include “car sales,” i.e., U.S.Core retail sales.
The retail volume growth is a positive factor for developing the national economy and increasing national currency value. The indicator marks the strength of consumer demand. Its growth indicates an increase in the production of goods, strengthening the economy and currencies.
What are Retail Trade Sales And Food Services Sales?
One of the top 8 economic indicators identifies the increase or decrease in different food-oriented sectors’ sales. The retail and foodservice sales changes are measured every month, and the reports are released.
Five thousand random samples from retail and foodservice firms are considered. As a result, the sales have corresponded to the present three million firms of the country that fall into this category.
Its importance?
Two-thirds of U.S. annual G.D.P. comprises spending on foo-related items or services. Therefore, an acceleration or declaration in the spending trends can help the analysts to identify future spending habits.
From where can you get the data?
The responsible department releases this data monthly. You can get the details at https://www.census.gov/.
Producer Price Index (PPI)
What is the Producer Price Index (PPI)?
Like the C.P.I. is measured from the consumers’ perspective, the PPI is measured from the producers’ perspective. It is more like a business equivalent to the C.P.I. The PPI calculates the average change in the selling price of goods and services produced over a specific period. It considers the price movements at the wholesale level rather than the price changes at the retail levels.
When calculating the G.D.P., we consider the final price of all the goods and services to avoid double-counting. Still, in PPI, we measure the prices throughout the stages of production – crude goods, intermediate goods, and the final goods to check the price movement.
Its importance?
The PPI provides the first step of inflation as it can be detected by analyzing the price movements of crude goods. If detected on time, the inflation can be controlled by intervening at its primary stage. This way, there will not be inflation in the C.P.I., and the economy will function smoothly. Therefore, identifying economic indicators is crucial.
From where can you get the data?
The Department of Labor’s Bureau of Labor Statistics takes care of both PPI and C.P.I. They release the data monthly. So you can get the report during the second whole week of the month. You can access the report at www.bls.gov/ppi/home.htm.
Consumer Confidence Survey
What is the Consumer Confidence Survey?
The Consumer Confidence Survey provides good economic data about the nation’s trust in the economy. It reflects the degree of optimism that people have towards the U.S. economy. Their savings and spending activities depict it.
To know whether the public is optimistic or pessimistic towards the economy, around some random 5000 people are asked to participate in a survey. It is not mandatory for everyone. These participants are asked questions about the labor market, their spending behavior, business conditions, financial and professional growth expectations for the next six months or more. The survey is not point-based. The individuals are asked to choose among the positive, neutral, and negative options.
Its importance?
As a rule of thumb, a person is reluctant to spend money without job security. As a result, they will be more encouraged to save and reduce their monthly expenditure on necessities. However, this is not a sign of a positive economy. On the contrary, a person spends more when confident that their income will not stop. Therefore, they are optimistic about their growth concerning that of the economy. Such behavior helps policymakers about the health of the economy.
From where can you get the data?
The data is released on the last Tuesday of each month by the Conference Board’s Consumer Research Center. You can get the full report at http://www.conference-board.org/data/consumerconfidence.cfm.
Money Supply (M2)
What is Money Supply (M2)?
In macroeconomics, Money Supply refers to the total value of money available for circulation in a country at a given point in time. As one of the five major economic indicators used by the Forex traders, the data of M2 is strictly based on the physical currency available like coins, bills, demand deposits, fixed deposits, traveler’s checks, assets in retail money market accounts, mutual funds that are less than $100,000, or other term deposits.
The data is exclusive of institutional money fund assets or time deposits of more than $100,000.
Its importance?
The key economic figures supplied by this data allow the banks to review the country’s current financial and economic conditions. After considering the stats, they alter their monetary policies by lowering or increasing interest rates. This is done to control the circulation of money in the economy.
M2 is helpful for economists and uses the data to make predictions about cyclical economic recessions. The same data is used to determine the possible recovery time and changes in stock prices. In addition, you can use M2 to speculate about changes in monetary policies.
While M2 has been around for a while, its importance has declined over the last two decades with the introduction of new indicators. This is because the latest economic indicators are more adept at keeping up with the movement of money, like the transfer of funds from savings accounts to investment accounts, the internationalization of the economy, and the new depository products. These things can render M2 redundant as it quickly goes out of sync when tracking these movements.
However, let’s not neglect that M2 does have great use when talking about long-term analysis. Banks and economists deploy this data to assess the long-term growth or reduction in currency circulation. The interest rate is decreased to give a jolt to the sluggish economy and increase the money supply. In contrast, the opposite is done to control the flow of money when the economy is overheated.
From where can you get the data?
The Federal Reserve System’s Board of Governors is responsible for releasing the data. It is done weekly (on Thursdays) and monthly. This data has become a staple for researchers and has been published since January 1959. You can find the details at www.federalreserve.gov/releases/h6.
Housing Starts (Earlier called “New Residential Construction”)
What are Housing Starts?
Housing Starts includes the new residential constructions that start during a particular month. It is an essential economic factor to consider. When construction begins on the footings or foundations of a single-family residence or under multiple-unit buildings, it becomes a part of that month’s Housing Starts. The data depicts the monthly permits issued for residential construction and the number of projects that have been finished.
Its importance?
It is one of the best indicators of a strong economy because you would pay to construct a house when doing well in other areas of your life. From the analysts’ point of view, they see how the change in mortgage rate affects Housing Starts. This is a highly volatile indicator. A change in Housing Starts can affect the financial conditions of the nation. Economists can figure out long-term trends by reading the housing starts.
From where can you get the data?
The U.S. Department of Commerce’s U.S. Census Bureau collects and publishes the monthly Housing Start data. You can find it online at https://www.census.gov/topics/business-economy.html.
Manufacturing and Trade Inventories and Sales
What are Manufacturing and Trade Inventories and Sales?
The collective data of shipments by manufacturers and the value of trade sales, along with the value of wholesale and retail inventories of a particular month, provide the data for manufacturing and Trade Inventories and Sales. In addition, the data shows the approximate ratio between stocks and sales. For example, how long will the inventories last if the sales continue at the same rate.
Its importance?
This data is the primary source that shows business inventories: business sales. Analysts use this data to identify whether the economy is growing or contracting. If the inventories are growing faster than sales, the economy is slow as people purchase less. Conversely, the economy is flourishing if the sales surpass inventories.
From where can you get the data?
The data is released by the Department of Commerce’s U.S. Census Bureau. You can find more details at https://www.census.gov/topics/business-economy.html.
In the end, this is not a report, but it is an excellent fundamental indicator of the U.S. economy:
S&P 500 Stock Index (the S&P 500)
What is the S&P 500?
The S&P 500 stands for Standard and Poor 500. An index shows the market value of 500 stocks publicly owned and placed in one equity basket. This basket has now become the industry benchmark for the performance of the U.S. equity markets.
Its importance?
The index shows the changes in the stock prices of the 500 companies. Economists use it to measure the nation’s capital stock and estimate the consumers’ confidence in the economy. In addition, it can signal long-term trends in stocks and futures markets.
From where can you get the data?
Standard & Poor’s gathers the data and releases this index. It shows real-time information, as well. You can track it at https://www.standardandpoors.com.
F.A.Q.
Some other economic indicators are essential as well.
Which economic indicator describes the process of generally declining prices?
An economic indicator that describes the process of generally declining prices is deflation. During deflation, consumer and asset prices decrease, the inflation rate becomes negative, and purchasing power increases.
Now there is one question:
Which of the following qualities of economic indicators do investors prize the most?
- Rigor
- Sample size
- Timeliness of release
- Government sponsorship
Investors prize the most timeliness of release. However, national producers of general economic statistics (Statistical Institutes) underlined the trade-off between timeliness and accuracy while accepting that timely releases are essential.
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