Forex glossary of terms
Forex macroeconomic indicators groups
An economic indicator (or business indicator) is a statistic about the economy. Economic indicators allow analysis of economic performance and predictions of future performance.
Economic indicators include various indices, earnings reports, and economic summaries, such as unemployment, housing starts, Consumer Price Index (a measure for inflation), industrial production, bankruptcies, Gross Domestic Product, retail sales, stock market prices, and money supply changes.
Economic indicators are primarily studied in a branch of macroeconomics called "business cycles". The leading business cycle dating committee in the United States of America is the National Bureau of Economic Research.
The Bureau of Labor Statistics is the principal fact-finding agency for the U.S. government in the field of labor economics and statistics.
Economic Indicators can be leading, lagging, or coincident which indicates the timing of their changes relative to how the economy as a whole changes.
Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future. Leading indicators are economic indicators which tend to change before the general economic activity.
A lagged economic indicator is one that does not change direction until a few quarters after the economy does. The unemployment rate is a lagged economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts to improve. Lagging indicators trail behind the general economic activity.
A coincident economic indicator is one that simply moves at the same time the economy does. The Gross Domestic Product is a coincident indicator. Coincident indicators are indicators which occur at the same time as the economic activity.
The time difference between the indicator and the economic activity is called lead time or lag time.
To understand economic indicators, we must understand the ways in which economic indicators differ. There are three major attributes each economic indicator has:
Relation to the Business Cycle / Economy
Economic Indicators can have one of three different relationships to the economy:
A procyclic (or procyclical) economic indicator is one that moves in the same direction as the economy. So if the economy is doing well, this number is usually increasing, whereas if we're in a recession this indicator is decreasing. The Gross Domestic Product (GDP) is an example of a procyclic economic indicator.
A countercyclic (or countercyclical) economic indicator is one that moves in the opposite direction as the economy. The unemployment rate gets larger as the economy gets worse so it is a countercyclic economic indicator.
An acyclic economic indicator is one that has no relation to the health of the economy and is generally of little use. The number of home runs the Montreal Expos hit in a year generally has no relationship to the health of the economy, so we could say it is an acyclic economic indicator.
Many different groups collect and publish economic indicators, but the most important American collection of economic indicators is published by The United States Congress.
Their Economic Indicators are published monthly and are available for download in PDF and TEXT formats. The indicators fall into seven broad categories:
Each of the statistics in these categories helps create a picture of the performance of the economy and how the economy is likely to do in the future.
Total Output, Income, and Spending
These tend to be the most broad measures of economic performance and include such statistics as (see above):
The Gross Domestic Product is used to measure economic activity and thus is both procyclical and a coincident economic indicator. The Implicit Price Deflator is a measure of inflation. Inflation is procyclical as it tends to rise during booms and falls during periods of economic weakness. Measures of inflation are also coincident indicators. Consumption and consumer spending are also procyclical and coincident.
Employment, Unemployment, and Wages
These statistics cover how strong the labor market is and they include the following (see above):
The unemployment rate is a lagged, countercyclical statistic. The level of civilian employment measures how many people are working so it is procyclic. Unlike the unemployment rate it is a coincident economic indicator.
Production and Business Activity
These statistics cover how much businesses are producing and the level of new construction in the economy (see above):
Changes in business inventories is an important leading economic indicator as they indicate changes in consumer demand. New construction including new home construction is another procyclical leading indicator which is watched closely by investors. A slowdown in the housing market during a boom often indicates that a recession is coming, whereas a rise in the new housing market during a recession usually means that there are better times ahead.
This category includes both the prices consumers pay as well as the prices businesses pay for raw materials and include (see above):
These measures are all measures of changes in the price level and thus measure inflation. Inflation is procyclical and a coincident economic indicator.
Money, Credit, and Security Markets
These statistics measure the amount of money in the economy as well as interest rates and include (see above):
Nominal interest rates are influenced by inflation, so like inflation they tend to be procyclical and a coincident economic indicator. Stock market returns are also procyclical but they are a leading indicator of economic performance.
These are measures of government spending and government deficits and debts (see above):
Governments generally try to stimulate the economy during recessions and to do so they increase spending without raising taxes. This causes both government spending and government debt to rise during a recession, so they are countercyclical economic indicators. They tend to be coincident to the business cycle.
These are measure of how much the country is exporting and how much they are importing (see above):
When times are good people tend to spend more money on both domestic and imported goods. The level of exports tends not to change much during the business cycle. So the balance of trade (or net exports) is countercyclical as imports outweigh exports during boom periods. Measures of international trade tend to be coincident economic indicators.
While we cannot predict the future perfectly, economic indicators help us understand where we are and where we are going. In the upcoming weeks I will be looking at individual economic indicators to show how they interact with the economy and why they move in the direction they do.
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