What Is Economic Indicator?
An economic indicator is a piece of economic data, typically on a macroeconomic scale, that analysts use to analyse current and prospective investment opportunities. These metrics can also be used to assess an economy’s overall health.
Economic indicators can be anything an investor wants, but specific data supplied by the government and non-profit groups has grown popular. Some examples of such indicators include, but are not limited to:
- The Consumer Price Index (CPI)
- Gross domestic product (GDP)
- Unemployment figures
- Price of crude oil
Economic Indicator Explained
Economic indicators are classified into groups or categories. Most of these economic indicators have a set publication schedule, allowing investors to anticipate and plan for certain data at specific times of the month and year.
Leading indicators are used to forecast an economy’s future movements, such as the yield curve, consumer durables, net business formations, and stock prices. These financial guideposts’ figures or data will shift or change before the economy, hence their category name. The information provided by these indicators should be taken with a grain of salt because it is possible that it is erroneous.
Coincident indicators, such as GDP, employment levels, and retail sales, are seen in conjunction with the occurrence of particular economic activities. This type of measure depicts the activity of a certain region or area. This real-time data is closely monitored by many policymakers and economists. Lagging indicators, such as the gross national product (GNP), the consumer price index (CPI), unemployment rates, and interest rates, are only visible after a certain economic activity has taken place. These data sets, as the name implies, show information after an event has occurred. This trailing indication is a technical indicator that appears following significant economic changes.
Economic Indicators and Their Interpretation
An economic indicator can only be beneficial if it is accurately interpreted. Economic growth, as measured by GDP, and corporate profit growth have historically had strong relationships. However, predicting whether a company’s earnings would expand solely on a single metric of GDP is practically impossible.
Interest rates, the gross domestic product, and existing house sales or other indicators are all objectively important. Why is it objectively significant? Because what you’re actually looking at is the cost of money, expenditure, investment, and the degree of activity in a significant part of the economy.
The Stock Market as an Indicator
Leading indicators predict where an economy will go in the future. The stock market is one of the most important leading indicators. Even while it isn’t the most important leading sign, it is the one that most people pay attention to. If earnings predictions are right, the market can reflect the economy’s trajectory because stock prices factor in forward-looking performance.
A strong market could indicate that profit estimates are rising, implying that total economic activity is increasing. A falling market, on the other hand, could imply that corporate earnings are projected to decrease. However, the stock market’s value as an indicator is limited because performance against estimates is not guaranteed, therefore there is a risk.