For the individual who watches CNN a great deal, the term Economic Indicators well recognized. However, for the individual who chooses not to make CNN a primary station, the term Economic Indicators can be extremely confusing. Economist often use very unlike terms when referring to the fluctuating economy. Economic Indicators happens to be one of the many terms that they use. So, what exactly are Economic Indicators, and what purpose do they serve? In addition to the previous stated questions, are they really that important?
Economic Indicators serve the purpose of spying on the economy, let me further elaborate. Economic Indicators are economic statistics. Examples of economic indicators are unemployment rates, GDP, and even the inflation rate. These so called Economic Indicators inform Economist how well, or how bad the economy is doing. By revealing the present state of the economy, the indicators allow economist to predict how well the economy will do in the future. Economic Indicators are very necessary. The levels of investments are contingent upon what Economic Indicators suggest. For example, if Economic Indicators suggest that the economy is going to do better or worst than the past, individuals may choose to change previous investment plans. As stated previously, economist and investors are dependent upon Economic Indicators.
There are three different types of relationships that Economic Indicators have with the economy. These three relationships of Economic Indicators should not be confused with the three types of Economic Indicators. Beginning with the types of Indicators, they can be classified as leading, lagging, or contemporaneous also called coincident. First, leading indicators are those that change ahead of the economy. This means that the leading indicators change before the economy. A good example of a leading indicator, which also will be used later on, is stock market returns. The stock market declines before it is evident in the economy and it increases before the economy is affected by it. The next type of an indicator is lagged. A lagged indicator changes after the economy does. It is referred to as lagged because it changes quarters after the economy. For example, the unemployment rate, one would consider to be a lagged indicator. Unemployment does not improve immediately after the economy improves. It will take two or three quarters so that unemployment reflects the economy. The last type of Economic Indicator is contemporaneous or coincident. A contemporaneous economic indicator is one that moves at the same rate as the economy. When the economy goes down, it is reflected by the indicator. Gross Domestic Product is considered to be a contemporaneous indicator. As the economy improves, GDP improves and as the economy declines the same is true for GDP. Without going into detail, the three relationships that Economic Indicators can have with the economy are Procyclical, Countercyclical, and Acyclic. If need be, they will be discussed later.
The first leading economic indicator that will be focused on is Monetary Policy. Monetary Policy is purposed to influence the performance of the economy. This will be done by factors such as inflation, economic output, and employment. By affecting the willingness of people and firms to spend money on goods and services is how Monetary Policy works.