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What are Economic Indicators?
The thing about opinions is that everyone has one. Being informed on a subject is no obstacle to having an opinion on that subject. In fact, at times it seems that the less one knows the more ardently they hold their opinion and the more urgently they feel they need to share that opinion. No where is this clearer than when the discussion fumbles over the economy. Many of us, and I include myself here, are worried by the economy, we are watching the Obama White House struggling to bring things under control, and most of us share our opinions on the economic news faster than news about our grandkids. I do it too, so, this is not a wag of the finger kind of article. The thing is, when I notice Im pontificating over something I have close to zero knowledge of, I stop and study. Of course, Im not always that quick about my noticing of stuff, still, I feel an obligation to gather information on topics that dangle in my attention corridor. Today it is the term Economic Indicators.
I watch the news, listen to pendants, read the Huffington Post, and sometimes the topic is the horrible condition of the economy according to this economic indicator, or that one, and I personally have noticed no changes in my daily life. Economic indicators are important because the tweaking and tinkering of our economy is triggered by these economic indicators. Unless we understand these indicators we cant know when the government should step in and do stuff, and when they should leave the economy alone and let it warm up and run without so much assistance.
Here is what Ive found out about ECONOMIC INDICATORS.
An economic indicator is a statistic on some aspect of the economy. Since statistics are just numbers, and Im mathematically challenged, already Im in trouble. Of course, I dont know how the combustion engine works, but I use one every day. A statistic is only as useful as our ability to interpret the data.
Economic indicators include statistics about unemployment rates, the gross domestic product ( GDP ), or the inflation rate. I have questions about an statistic being used as an economic indicator:
What got counted to create the statistic?
If this topic has been counted before, has the current data and the past data been gathered the same way, or not?
Can a statistic really tell us how well the economy is functioning?
Can a statistic tell us exactly how we should tweak the economy to get better numbers?
Basically, there are three areas of interest we need to notice about each of the usual economic indicators. We need to know:
- What is the relationship of the economic indicators to the economy?
- How frequently is a given statistic gathered, and
- Statistical timing. Is the statistic indicating the past, present, or future of the economy?
Lets look at each of these three areas with slightly more detail:
What do the relationship of the indicators to the economy?
An indicator may be procyclical. This means that the economic indicator always moves in the same direction as the economy. If the economy is growing, the indicator is also increasing, and if the economy sucks, well, the statistical indicator is circling the drain. An example of a procyclical economic indicator is the Gross Domestic Product ( GDP ).
If there are procyclical indicators then there must be counter cyclical indicators. A countercyclical economic indicator is one that goes in the exactly opposite direction of the economy. If the economy is improving the countercyclical number is going down. If the countercyclical number is going up, the economy is heading for the basement. An example of a countercyclical economic indicator would be unemployment numbers.
How frequently is a given statistic gathered?
Think of an economic indicator as a report card. It isnt too helpful if the report card only comes out once a year. If you want to adjust things, to tweak the economy, it makes sense that you check progress frequently. The longer you go between checking economic health allows the economy to suffer pneumonia when, with a little early intervention we could treated the sniffles and avoided the pneumonia. Most countries gather GDP numbers, and most countries gather that information every three months (quarterly). You can compare this GDP to the last one and see if things are getting better or worse. The Dow Jones measures stock sells and they do that continuously throughout the trading day, so this indicator is coming out moment by moment. If you have a frequency of data you can make a graph and that gives you a visual way to chart our economic health.
What is the timing of the economic indicators?
What I mean by timing is this: some statistics lead, some lag, and others coincide.
A l eading economic indicator is one that changes BEFORE the economy changes. A leading economic indicator is so very useful because it predicts the future. If you know you are going to crash before you actually crash you can buckle your economic seatbelt and brace yourself for the impact. Usually, people think of the stock market as a leading economic indicator because when the stock market tanks, what follows is lower sells ( GDP ), and greater unemployment. If the stock market has dramatic increases what usually follows are higher GDP numbers and lower unemployment figures. The indicator we look to as an indicator that the recession is ending, is usually a Bull Market.
A lagging economic indicator is one that does not change direction until a few quarters after the economy does. Lagged indicators may provide us with useful information, but it is not information we should panic over because by the time we get the information what it indicates has already happened. When we get unemployment figures that does not indicate that those people are losing their jobs NOW , it means that those people lost their jobs in the past. In fact, the economy can be improving while the unemployment numbers continue to go down for another 2 or 3 quarters.
There are also coincident economic indicators. The Gross Domestic Product is a coincident economic indicator, sort of. The GDP changes with the economy, but the problem with it is that we only get new GDP numbers every three months. The GDP is both a procyclical and a coincident economic indicator.
Article submitted Sunday, May 03, 2009 & read 1082 times.
Tex Norman is a social worker, currently working at the Oklahoma DHS Abuse and Neglect hotline. He will have been married to Kathie for 40 years this August 2012. He has a son Ryan who earned a PhD from Princeton. Tex spends his free time working as an artist and writer. : http://texnormanartist.blogspot.com/ ... http://collagepoetrybytex.blogspot.com/
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