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Use of Economic Indicators |
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© Daniel Carrasco
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When we ask about the economic situation of a country or a region we focus primarily on aspects of the growth and price behaviour of that economy.
- Is the Eurozone economic overcoming its stagnation?
- Is the U.S. economy losing momentum?
- Has Japan gone into recession?
- Is there inflation pressure in the UK?
- Is Japan still undergoing deflation?
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Economic indicators are the tools used to respond to such questions. There are indicators of economic growth (GDP, industrial production, number of hours worked, etc.) and price indicators (consumer price index - CPI) , production prices, unit labour costs, etc.).
The behavior of economic indicators is decisive in the evolution of major financial markets, i.e. interest rate development, stock prices and the trading of currencies.
Keep in mind however, that other factors also influence the behaviour of these markets and, consequently, have to be closely monitored. Among these we highlight the following:
- The statements, decisions and policies taken by the monetary authorities.
- Possible problems in the balance sheets of companies.
- The production of crude oil held by OPEC (Organization of Petroleum Producing Countries).
- International conflicts and geopolitical uncertainty.
- Debt non-payment in emerging countries. Etc.
Figure 1: Economic indicators help us understand the economic situation of a country. Its development will be decisive in the behavior of different financial markets.
At this point, we must qualify the usefulness of economic indicators.
Economic indicators allow us to:
- Define the present economic situation and provide us with information about the current state of health of an economy.
- Anticipate the future behavior of an economy and provide us with information from which to draw conclusions about the possible direction an economy will take in the coming months.
In conclusion, economic indicators will show us how an economy is currently and how we can expect to find it in the near future.
Example: Update on the U.S. economy.
This example will allow us to define, by way of simplification, the situation
of the U.S. economy from the information provided by economic indicators.
Graph 1: GDP and U.S. industrial output since 1990.
Graph 1 shows, from the GDP evolution of, how the economy U.S. grew significantly in the nineties. About 4.0% yoy. This activity stopped after the second half of 2000, when the economy began to slow. In late 2001, activity remained stagnant. Thereafter, however, there was a further change of trend that led the economy to finally recover growth rates similar to those in the nineties.
The graph also shows how the industrial production moves in a similar way to the PIB.
The interesting thing about this series is that it is published on a monthly basis, while the GDP is known quarterly. This means that although the GDP is the basic indicator of economic activity in a country, there are similar indicators, with greater frequency, which inform us on the behaviour of an economy.
Taking a step further into the analysis, we can break down the GDP in terms of expenditure or added demand. To do this, we must determine the different uses given or destinations of the final goods and services produced in a country.
The total demand for domestic output of a country consists of four components or aggregates:
- Household consumption.
- Business investment.
- The purchase of goods and services by the State.
- Foreign demand.
GDP = private consumption + private investment + government purchases + net exports
For each of these aggregates there are monthly indicators which tell us about their behavior and, consequently, the behavior of the economy in general.
Graph 2: Evolution of private consumption and retail sales excluding autos in United States since 1993.
Graph 3: Evolution of total investment and orders for capital goods in the United States since 1990.
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Macroeconomic Analysis 
