An Economic Indicator is a Statistic About the Economy

7/29/2019 An Economic Indicator is a Statistic About the Economy

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An Economic indicator is astatisticabout theeconomy. Economic indicators allow analysis ofeconomic performance andpredictionsof future performance. One application of economicindicators is the study ofbusiness cycles. Economic indicators include various indices, earningsreports, and economic summaries. Examples:unemploymentrate, quits rate,housing starts,Consumer Price Index(a measure forinflation),Consumer Leverage Ratio,industrial

production,bankruptcies,Gross Domestic Product,broadband internet penetration,retail sales,stock marketprices,money supplychanges.

The leading business cycle dating committee in theUnited States of Americais theNationalBureau of Economic Research(private). TheBureau of Labor Statisticsis the principal fact-finding agency for the U.S. government in the field of labor economics and statistics. Otherproducers of economic indicators includes theUnited States Census Bureauand United StatesBureau of Economic Analysis.

Components of the Conference Board's Leading Economic Indicators Index

1. Average weekly hours (manufacturing)

Adjustments to the working hours of existingemployees are usually made in advance of new hires or layoffs, which is why themeasure of average weekly hours is a leading indicator for changes in unemployment.and also

2. Average weekly jobless claims forunemployment insuranceThe CB reverses thevalue of this component from positive to negative because a positive reading indicates aloss in jobs. The initial jobless-claims data is more sensitive to business conditions thanother measures of unemployment, and as such leads the monthly unemployment datareleased by theU.S. Department of Labor.

3. Manufacturers' new orders for consumer goods/materialsThis component isconsidered a leading indicator because increases in new orders for consumer goods and

materials usually mean positive changes in actual production. The new orders decreaseinventory 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 thebusiness cycle because an increase in delivery time can indicate rising demand formanufacturing supplies. Vendor performance is measured by a monthly survey from theNational Association of Purchasing Managers (NAPM). This diffusion index measuresone-half of the respondents reporting no change and all respondents reporting slowerdeliveries.

5. Manufacturers' new orders for non-defensecapital goodsAs stated above, new orderslead the business cycle because increases in orders usually mean positive changes inactual production and perhaps rising demand. This measure is the producer's counterpartof new orders for consumer goods/materials component (#3).

6. Building permits for new private housing units.7. The Standard & Poor's 500 stock index TheS&P 500is considered a leading indicator

because changes in stock prices reflect investor's expectations for the future of theeconomy and interest rates.

8. Money Supply (M2) Themoney supplymeasures demand deposits, traveler's checks,savings deposits, currency, money market accounts, and small-denominationtime
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deposits. Here, M2 is adjusted for inflation by means of the deflator published by thefederal government in the GDP report. Bank lending, a factor contributing to accountdeposits, usually declines when inflation increases faster than the money supply, whichcan make economic expansion more difficult. Thus, an increase in demand deposits willindicate 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) Theinterest ratespread is often referred to as the yield curve and implies the expected direction of short-,medium- and long-term interest rates. Changes in theyield curvehave been the mostaccurate predictors of downturns in the economic cycle. This is particularly true when thecurve becomes inverted, that is, when the longer-term returns are expected to be less thanthe short rates.

10.Index of consumer expectationsThis is the only component of the leading indicatorsthat is based solely on expectations. This component leads the business cycle becauseconsumer expectations can indicate future consumer spending or tightening. The data forthis component comes from theUniversity of Michigan's Survey Research Center, and is

released once a month.

India Economic Indicators

The India economic indicators are essential as they given an accurate status of India's economyat different points of time. Various types of Indian economic indicators are used for variousperiods of time. There are also indicators which are used for separate administrative divisionssuch as states. These help us to analyze the Indian economy.

Gross Domestic Product of India

The gross domestic product (GDP) of India, according to purchasing power parity was US$2.996 trillion in the financial year 2007. And in terms of official exchange rate, it was US$1.099 trillion. There was a real growth rate of 9 percent in India's gross domestic product for thefinancial year 2007.

Per capita gross domestic product (GDP) of India in terms of purchasing power parity in thefinancial year 2007 was US $2,600. The agricultural sector contributed 17.2% of India's gross

domestic product; the industrial sector contributed 29.4% of the GDP while the services sectorcontributed 53.7% of the GDP in the financial year 2008.

Rate of inflation in India
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An important economic indicator is the rate of inflation. The rate of inflation (CPI) was 7.8% forthe year 2008. In 2007, the rate of inflation as per the wholesale price index was 8.75 percent.

Important Indian economic indicators

The different various types of economic indicators can be classified into various categories

such as -

Selected economic indicators month-wise The Economic position established on the main indicators of the economy Key indicators of Indian economy Plan-wise selected indicators of development in India social development indicators in India Socio-economic indicators for states in India Certain debt indicators of central and state governments Select state governments fiscal indicators State-wise relative index of infrastructure in India Macro-economic performance indicators Certain fiscal indicators of the central government Selected economic indicators in India Selected commodities market prices Selected indicators of Indian economy

Industrial growth

The industrial growth in December 2008 was 1.0 per cent for mining, -2.5 per cent formanufacturing and 1.6 percent for the electricity sector. The revised annual growth for April-December, 2008-09 for mining was 3.0 per cent, for manufacturing was 3.3 per cent and 2.7 percent for the electricity sectors. There was lesser growth for capital goods and basic goods inDecember, 2008.

Foreign Institutional Investors' FII

There were net investments by foreign institutional investors' (FIIs) to the tune of US$ 10 billion

from April to September of 2009-10. Most of these investments have come from the primarymarket. According to the Securities and Exchange Board of India (Sebi), FII net investment wasUS$ 7.08 billion till 6 November 2006.

Foreign Direct Investment FDI


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In July'09, the inflow of foreign direct investment (FDI) was US$ 3.5 billion according to Mr

Anand Sharma, the Commerce and Industry Minister. During April-July 2009, FDI equity

inflows receipts were US$ 10.532 billion. In June 2009, India attracted foreign direct investment

worth US$ 2.58 billion according to the Department of Industrial Policy and Promotion (DIPP).

U.S. Economic Indicators

It may be hard to believe all this action and reaction can be triggered by just a singlestatistic. If

you multiply that by more than 50 economic indicators that are released every week, month, or

quarter, you begin to understand why the stock, bond, and currency markets are in a perpetual

state of motion. Among the other influential economic indicators that can rattle financial markets

are consumer prices, industrial production, retail sales, and new home construction. It is

precisely because these indicators can so easily sway the value of investments that the

government takes extraordinary steps to control the flow of sensitive economic information.

That wasn't always the case. Thirty years ago, barely any guidelines applied to the release of

economic reports. A lock-up room was a term reserved for prisons, not press rooms. The lack of

strict ground rules on the publication of these influential statistics created the perfect climate for

abuse. Politicians tried to control the release of economic news to score points with voters.

When President Nixon heard the Commerce Department was about to go public with an upbeat

figure on housing starts, he pressed the agency to time the release for maximum political effect.

On those occasions when economic figures turned out to be a liability, Nixon sought to hold up

the report until such time he believed its release would get little notice.

Even Wall Street firms realized that big money could be made off the economic numbers given

the lax supervision of their release. Some brokerages went so far as to dish out large amounts

of money to reporters who were willing to leak economic news to the firm's traders before writing

about it. Anyone who got an advance peek at the economic statistics stood to gain millions in a

matter of minutes by knowing which stocks and bonds to trade. Eventually this blatant

manipulation of the economic indicators led a furious Senator William Proxmire to schedule

Congressional hearings in the 1970s on how these reports are released. Later that decade, the

government set up a strict calendar that included rigid rules on how economic data would be

distributed. Today, nearly every major economic indicator is released under tight lock-up

conditions, which has enhanced the integrity of how the public gets such sensitive information.

Trading based on inside information of economic indicators is now virtually unheard of.


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This still leaves us with the most important task of all, though. How do you decipher what all

these indicators actually tell us about the economy? After all, at least four key economic

indicators are released on a weekly basis, 43 every month, and nine each quarter. Do we really

need so many measures? Absolutely. The U.S. is the largest and most complex economy in the

world. No single indicator can provide a complete picture of what the economy is up to. Nor is

there a simple combination of measures that provide a connect-the-dots path to the future. At

best, each indicator can give you a snapshot of what conditions are like within a specific sector

of the economy at a particular point in time (seeTable 1A). Ideally, when you piece all these

snapshots together, they should provide a clearer picture of how the economy is faring and offer

clues on where it is heading.

Yet even if you took the time to absorb every bit of economic information and monitored each

squiggle in the indicators, don't expect to uncover a crystal-ball formula that can single-handedly

forecast what consumer spending, inflation, and interest rates will do in the months ahead.

That's because there are some important caveats when dealing with economic indicators. First,

they often fail to paint a consistent picture of the economy. Different indicators can

simultaneously flash conflicting signals on business conditions. One can show the economy

improving, while another may point to a clear deterioration. For example, the government might

report a drop in the unemployment rate, normally a bullish sign for the economy. However, a

different employment survey might show a day or two later that companies are laying off

workers in record numbers. You're now presented with two contradictory portraits on labor

market conditions, both covering the same time period. Which should you believe?

Table 1A

The confusion doesn't stop there. Another complication, one especially

maddening to investors and economists, is that people can behave

counterintuitively. Just look at two ostensibly related reports: consumer confidence and

consumer spending. The first measures the general mood of potential shoppers; if they are

upbeat about the economy, it stands to reason they will spend more. If there is widespread

gloom and uncertainty about the future, logic would lead you to believe people will curb theirspending and save money instead. However, that's not the way it plays out in the real world.

There appears to be little relationship between these two measures. During the mild 2001

recession, consumer confidence kept plummeting throughout the year, reaching levels not seen

in decades. Yet these same consumers not only refused to cut back on spending that year, they

bought homes and cars at a record pace. Obviously, one cannot determine the outlook for

consumer spending just by monitoring the psychological state of American households. The
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inclination to spend is influenced by many factors, including personal income growth, job

security, interest rates, and the build-up in wealth from the value of one's home and the

ownership of stocks and bonds.

There is also the quandary that comes with abundance. Everyone

from the professionalmoney manager down to the mom dabbling part time in the marketscan be overwhelmed by

the statistical minutia out there. How do you discern which indicators are worth watching and

which ones to view with skepticism or even ignore? How does an investor employ economic

indicators to help choose which stocks and bonds to buy and sell, and when? Which measures

should a business forecaster follow to spot coming economic trends? What key indicators

should corporate chiefs rely on to help them decide whether to hire new workers or invest in

new equipment?

You can find the answers to these questions in subsequent chapters, but clearly some

economic indicators are far more telling than others. Generally, the most influential statistics,

those most likely to shake up the stock, bond, and currency markets, possess some of the

following attributes:

Accuracy: Certain economic measures are known to be more reliable than others in

assessing the economy's health. What determines their accuracy is linked to how the data

is compiled. Most economic indicators are based on results of public surveys. Getting a

large and representative sample is thus a prerequisite for accuracy. For instance, to

measure the change in consumer price inflation, the government's Bureau of Labor

Statistics sends out agents and conducts telephone interviews every month to find out how

much prices have changed on 80,000 items and services at 23,000 retail outlets around

the country. To calculate shifts in consumer confidence, the Conference Board, a business

research organization, polls 5,000 households each month.

Another variable is the proportion of those queried who actually came back with answers.

How quickly did they respond? The bigger and faster the response, the better the quality of

the data and the smaller the subsequent revisions. If an indicator has a history of suffering

large revisions, it generally carries less weight in the financial markets. After all, why should

an investor buy stocks or a company hire additional workers when the underlying economic

statistic is suspect to begin with? The monthly construction spendingreport by the

Commerce Department is one that gets substantially revised and is thus often ignored by

the investment community. In contrast, housing startsfigures are rarely revised, which is

why this indicator is taken far more seriously.


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Timeliness of the indicator: Investors want the most immediate news of the economy that

they can get their hands on. The older the data, the more yawns it evokes. The more

current it is, the greater the wallop it packs on the markets. Case in point: Investors pay

close attention to the employment situationreport because it comes out barely a week after

the month ends. In contrast, there's far less interest in the Federal Reserve's consumer

installment creditreport, whose information is two months old by the time it's released.

The business cycle stage: There are moments when the release of certain economic

indicators is awaited with great anticipation. Yet those sameindicators barely get noticed at

other times. Why do these economic measures jump in and out of the limelight? The

answer is that much depends on where the U.S. economy stands in the business cycle.

(The business cycle is a recurring pattern in the economy consisting first of growth,

followed by weakness and recession, and finally by a resumption of growth again. We'll

take a closer look at the business cycle in the next chapter.) During a recession, when

there are lots of unemployed workers and idle manufacturing capacity, inflation is less of a

concern. Thus, measures such as the consumer price index, which gauges inflation at the

retail level, do not have the same impact on the financial markets as they would if the

economy were operating at full speed. During recessionary periods, indicators that grab the

headlines are housing starts, auto sales, and the major stock indexes because they often

provide the earliest clues that an economic recovery is imminent. Once business activity is

in full swing, inflation measures like the CPI take center stage again while the other

indicators recede a bit to the background.

Predictive ability: A few indicators have a reputation of successfully spotting turning points

in the economy well in advance. We mentioned how housing and auto sales as well as the

stock indexes have such characteristics. However, other less-known measures are

harbingers of a change in business activity. One such indicator is the advance orders for

durable goods. Generally, economic gauges known for being ahead of the curve carry

more weight with investors.

Degree of interest: Depending on whether you're an investor, an economist, amanufacturer, or a banker, some indicators might be of greater interest to you than others.

Business leaders, for instance, might focus on new home salesandexisting home

salesfigures to see whether Americans are in a shopping mood. By monitoring such

statistics, companies selling furniture and appliances can decide whether to expand

operations, invest in new inventories, or shut down factories.


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Those in the forecasting business want to know what's ahead for the economy and thus

concentrate on a set of measures known as "leading indicators." These include initial

unemployment claims, building permits,the ISM purchasing managers report,and the yield

curve.

Investors in the financial markets also have their favorite indicators; the specific measures they

watch depend on what assets are at greatest risk. Those trading stocks focus on indicators that

foreshadow changes in consumer and business spending because they can affect future

corporate profits and the price of shares (see Table 1B). For bond traders, the looming concern

is not company profits but the outlook for inflation and interest rates. Any evidence suggesting

that inflation might accelerate can hurt bonds. (See Table 1C for the economic indicators most

sensitive to the bond market.) Players in the currency markets look for economic news that can

drive the dollar's value up or down. Signs pointing to a robust U.S. economy, for example,

normally lure foreigners to invest in this country, especially if the other major economies show

comparatively little growth. That lifts the greenback's value against other currencies. (See Table

1D for the measures most likely to move the dollar.)

An Economic Indicator is a Statistic About the Economy

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