April 26, 2011 – The release of a government statistic can create chaos in the economic markets affecting everything from the interest rate paid on mortgages to the prices paid for gasoline and groceries. Government groups including the Department of Labor, the Bureau of Economic Analysis, the Commerce Department and the U.S. Census Bureau typically release these government statistics, known as economic indicators, each month.
The broadest barometer of economic activity is Gross Domestic Product (GDP), which measures the nation’s total output of goods and services. Other examples of key indicators include Consumer Confidence, which predicts sudden shifts in consumption patterns; the Consumer Price Index (CPI), a measure of the price levels of goods and services; the Producer Price Index (PPI), which measures prices for goods at the wholesale level; and Retail Sales, a measure of total receipts of retail stores.
Key indicators gauge how well the economy is doing or how well it may do in the future. They have one of two different relationships to the economy: procyclic or countercyclic.
A procyclic indicator moves in the same direction as the economy. If the economy is healthy, the indicator increases, and if the economy is in poor shape, the indicator will decrease. Consumer Goods and GDP are examples of procyclic indicators.
On the other hand, indicators that increase when the overall economy is slowing down are classified as countercyclical. For example, as the economy gets worse, a countercyclical indicator such as the Unemployment Rate will increase.
Key indicators can also be placed into three categories according to their timing in the business cycle: leading, lagging and coincident.
Leading indicators typically change before the economy enabling them to be short-term predictors of economic activity. Examples of leading indicators are building permits, money supply and stock prices.
Lagging indicators, such as unemployment, labor cost and interest rates, change after the economy changes, while coincident indicators occur at approximately the same time as the economy. Examples include personal income, GDP and retail sales.
Key economic indicators are among the most closely watched reports in the financial world. While they cannot predict with certainty what will happen, they do help us understand where the economy is presently and where it might go.