Economic indicators are regularly released governmental statistics that indicate the growth and health of a country especially its economy. Economic indicators mostly influence the value of a country’s currency. These are key statistics that show the direction of the economy. The Trade Deficit, the Gross National Product (GNP), Industrial Production, the Unemployment Rate, Inflation Rate, Factory Utilization Rate and the Business Inventories are instances of economic indicators.
Economic indicators are used to analyze the economic behavior of a country and predict the manner in which economy will act in near future. On the basis of types of predictions economic indicators are of three kinds:
·Coincident economic indicator
·Leading economic indicator
·Lagging indicators
A coincident economic indicator happens in tandem with an economic event. This indicator occurs at approximately the same time as the conditions they signify. The paradigm instance of it is company payrolls. These payrolls are coincident indicators because they make payment and simultaneously increase the localized economy. Personal income is also a coincidental indicator for the economy. High personal income rates will coincide with a strong economy. The coincident indicators do not predict future events but change with a change in time and economy of the stock market.
A lagging indicator is one that follows an event. This indicator is an event, which happens after the corresponding economic cause occurs just like the amber light is a lagging indicator for the green light as amber trails green. The unemployment rate of a country is an example of a lagging indicator because as the economy is doing badly or companies are expecting a downturn in the economy, the unemployment rate increases accordingly. Media is also a lagging economic indicator for the news is always reported few hours before the actual economic fluctuation that they point to. A lagging indicator is immensely significant because of its ability to confirm that a pattern is happening or about to occur.
Leading indicators are events that take place right before an economic shift. The leading indicators are instrumental in forecasting future events. The leading indicators exhibit immense accuracy in the world of finance. An example of leading indicators is the bond yields. Bond yields are leading indicators of the stock market because on behalf of these bond traders anticipate and further course of the stock market and economy of the country.
However in economics the classification of several factors is subject to debate. For instance according to some people the Federal Reserve is a leading indicator while for others it is a lagging indicator. The trend of the market indicates either that the market reacts to the Federal Reserve changing interest rates or that the Federal Reserve changes interest rates only in response to the market. Seeing practically the Federal Reserve can be viewed as both a leading and lagging indicator.
Every week dozens of economic surveys are conducted and several economic indicators are released. In order to understand the current and future of the market and so enjoy a successful business, it is very important for all the investors to crack the economic indicators skillfully.
Obviously, factors other than economic indicators move prices and as such make other markets more or less potentially profitable. But since a currency is a proxy for the country it represents, the economic health of that country is priced into the currency. One very important way to measure the health of an economy is through economic indicators.
The challenge comes in diligently keeping track of the nuts and bolts of each country's particular economic information package. Here are a few general comments about economic indicators and some of the more closely watched data.
Most economic indicators can be divided into leading and lagging indicators.
Leading indicators are economic factors that change before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy.
Lagging Indicators are economic factors that change after the economy has already begun to follow a particular pattern or trend.
The Gross Domestic Product (GDP)
The sum of all goods and services produced either by domestic or foreign companies. GDP indicates the pace at which a country's economy is growing (or shrinking) and is considered the broadest indicator of economic output and growth.
Industrial Production
It is a chain-weighted measure of the change in the production of the nation's factories, mines and utilities as well as a measure of their industrial capacity and of how many available resources among factories, utilities and mines are being used (commonly known as capacity utilization). The manufacturing sector accounts for one-quarter of the economy. The capacity utilization rate provides an estimate of how much factory capacity is in use.
Purchasing Managers Index (PMI)
The National Association of Purchasing Managers (NAPM), now called the Institute for Supply Management, releases a monthly composite index of national manufacturing conditions, constructed from data on new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders, and import orders. It is divided into manufacturing and non-manufacturing sub-indices.
Producer Price Index (PPI)
The Producer Price Index (PPI) is a measure of price changes in the manufacturing sector. It measures average changes in selling prices received by domestic producers in the manufacturing, mining, agriculture, and electric utility industries for their output. The PPIs most often used for economic analysis are those for finished goods, intermediate goods, and crude goods.
Consumer Price Index (CPI)
The Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services. It reports price changes in over 200 categories. The CPI also includes various user fees and taxes directly associated with the prices of specific goods and services.
Durable Goods
Durable Goods Orders measures new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. A durable good is defined as a good that lasts an extended period of time (over three years) during which its services are extended.
Employment Cost Index (ECI)
Payroll employment is a measure of the number of jobs in more than 500 industries in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments.
Retail Sales
The retail sales report is a measure of the total receipts of retail stores from samples representing all sizes and kinds of business in retail trade throughout the nation. It is the timeliest indicator of broad consumer spending patterns and is adjusted for normal seasonal variation, holidays, and trading-day differences. Retail sales include durable and nondurable merchandise sold, and services and excise taxes incidental to the sale of merchandise. Excluded are sales taxes collected directly from the customer.
Housing Starts
The Housing Starts report measures the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing.
Housing is very interest rate sensitive and is one of the first sectors to react to changes in interest rates. Significant reaction of start/permits to changing interest rates signals interest rates are nearing trough or peak. To analyze, focus on the percentage change in levels from the previous month. Report is released around the middle of the following month.
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