2/12/2024

Economic indicators: how to interpret?

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This week, markets are again awaiting the release of US economic data. This time, attention is mainly focused on the consumer price index and producer price index. Therefore, it’s time to look at the question on a rather basic but important topic – what are economic indicators and how to interpret them.

Economic indicators are macroeconomic data that serve as analytical tools for assessing current and future investment opportunities, as well as for determining the overall health of the economy.

Despite the variety of indicators, indicators published by government and non-profit organizations play a special role. These include, in particular, the already mentioned consumer price index, unemployment rate and gross domestic product (GDP).

Types of economic indicators

Economic indicators can be divided into three main categories:

Leading indicators. These include the yield curve, durable goods demand indicators, the number of new businesses and stock price movements, which serve as tools for forecasting future economic trends. The name of this category of indicators is due to the fact that changes in their values precede changes in the economy as a whole. Analysis of leading indicators allows making macroeconomic forecasts. For example, many investors track forward yield curves to estimate the impact of future interest rates on stock and bond returns.

Matching indicators. First of all, these are GDP, employment levels and retail sales, which reflect current economic activity. These indicators provide insight into the dynamics of specific sectors or regions. Many policymakers and economists closely monitor real-time coincident indicators because they provide the most accurate picture of the current state of the economy. However, coincident indicators may be less useful for investors and traders, for whom the predictive factor is important. Their value lies in correctly interpreting how current economic conditions (eg, declining GDP) will affect future periods.

Lagging indicators. In this category are the gross national product (GNP), the consumer price index (CPI), the unemployment rate and interest rates, which reflect economic activity after it has ended. As the name suggests, these indicators do not provide advanced information, but only record events that have already occurred. Although lagging indicators are still used by economists, policymakers and traders, their analysis carries the risk of making erroneous decisions based on outdated information.

How to correctly interpret economic indicators

Economic indicators serve as valuable tools for assessing the health of the economy. However, their benefits manifest themselves only with correct interpretation.

1. Limited application to individual companies:

  • Although GDP growth correlates with company profit growth, it is impossible to confidently predict the profit growth of a particular company based on GDP alone.
  • Assessing a company’s prospects requires a comprehensive analysis that includes many factors other than GDP.

2. The significance of indicators for assessing the economy:

  • Economic indicators reflect important macroeconomic parameters such as the cost of money, spending, investment and the level of economic activity.
  • They allow you to track changes in these parameters over time, providing valuable information about the dynamics of the economy.

3. Comparative analysis as the key to understanding:

  • Economic indicators are most valuable when compared over a certain period of time.
  • For example, comparing the current unemployment rate with its values over the past five years allows us to draw deeper conclusions about the dynamics of unemployment and the labor market.

4. The need for an integrated approach:

  • To accurately assess economic conditions and predict future trends, it is necessary to use more than one indicator.
  • A comprehensive analysis taking into account various factors will provide a more complete picture and make more informed conclusions.
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