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Economic Indicators: Definition, Role, Types & Examples
Economic indicators are statistics that refer to the well-being of a wider economy, such as the UK, Eurozone or the USA. They are a driving force behind government and central bank policy, as well as decisions made by institutions, traders and individual investors.
QUOTE
We shouldn’t measure everything in terms of GDP figures or economics. There is something called quality of life.
Big ideas
- Economic indicators are the major statistics that inform investment activity. The major indicators come from official government departments. They are usually released at monthly or quarterly intervals.
- The most common statistics relate to the Gross Domestic Product (GDP), inflation, jobs, government finances, and interest rates. These economic indicators impact policy-making and investment decisions.
- It is better to look at numerous indicators for a more well-rounded analysis. No single indicator is infallible. Indeed, economists are perpetually arguing about the viability of economic indicators and groups of indicators.
What are economic indicators?
DEFINITION
Economic indicators are merely statistics that point to whether some part or all of the economy is overperforming or underperforming, typically on a yearly time frame.
Official statistics are released by specific government departments, such as the Office for National Statistics (ONS) in the UK, the Federal Reserve Economic Data (FRED) in the USA, and the Eurostat in the EU. This data can then be parsed or reinterpreted by commercial firms such as investment banks or brokers to clients and subscribers.
Individual investors need to comprehend what an economic indicator means, how it relates to the wider arena of indicators, and how the market typically interprets the data. A superficial understanding will only lead to poor decision-making. Moreover, the type of economic indicator also needs to be understood.
Individual investors need to comprehend what an economic indicator means, how it relates to the wider arena of indicators, and how the market typically interprets the data. A superficial understanding will only lead to poor decision-making. Moreover, the type of economic indicator also needs to be understood.
The 3 main types of economic indicators
There are three main categories of economic indicators; leading, lagging, and coincident.
- Leading economic indicators - these point towards an upcoming change in the economy, being predictive of a future shift. These indicators are the first to predict periods of growth or economic recessions but tend to be early as far as making investment decisions.
- Lagging economic indicators - these confirm an economic situation after the fact. This doesn't mean they are useless. They can confirm hypotheses of past investments and point towards future investments. The Consumer Price Index (CPI) and unemployment rates are examples of lagging indicators of inflation and employment respectively.
- Coincident economic indicators - these indicators change in real-time with the broader economy, meaning they neither lead nor lag the economic variable they measure. An example would be retail sales or industrial production, which report the most current level of activity available from over the past month.
In other words, leading indicators represent the future, lagging indicators the past, and coincident indicators the present.
The main economic indicators to know about
The most widely followed indicators and reports include:
- Gross Domestic Product (GDP) - this is the overall market value of all goods and services produced within a country in a given time frame, typically a year. It can be divided into nominal GDP, real GDP, and GDP per capita.
- Consumer Price Index (CPI) - this is an overall inflation rate which determines the percentage increase in the price of goods. It is subdivided into 13 sectors. Inflation rates are closely tied to money printing policies. The more money printed, the higher the inflation rate.
- Interest rates - this is set by a central bank, such as the Bank of England. It is the rate at which money can be borrowed. A higher interest rate represents a lower money supply and deflation. A low or zero interest rate represents a higher money supply and inflation.
- Unemployment rate - this is the percentage rate of employment. It is found in the quarterly Labour Force Survey (LFS). A high employment rate (or low unemployment rate) is viewed as synonymous with a booming economy. The report also typically contains information such as labour productivity, job vacancies, weekly earnings, etc.
- Balance of payments (BOP) - this is a quarterly report that tracks a country's trade, including goods, services, income, assets, liabilities, and current and capital transfers. It plays a significant role in determining a currency's purchasing power. Since 1983, the UK has consistently been a net borrower from the rest of the world, running a deficit in both its current and capital accounts.
- Retail sales - a monthly report based on surveys from thousands of large retailers provides insights into consumer spending trends. The data typically covers key retail sectors, including food stores, non-food stores, non-store retailing, and fuel stations. For example, in the UK, the ONS conducts a survey of over 5,000 major retailers to track retail performance across these categories.
- Consumer Confidence Index - this index measures public sentiment about the economy and personal finances, influencing consumer spending and investment. A high confidence level reflects optimism and a greater likelihood of spending, while low confidence signals caution, potentially slowing economic activity. For instance, in the UK, the Consumer Confidence Index tracks perceptions of the British economy and household financial stability.
While the ONS is the main source of reliable UK official statistics, there are credible commercial entities that also release reports. This includes the Halifax House Price Index (which has been around for longer than the equivalent ONS index) and the GfK Consumer Confidence Barometer.
Economic reports from the USA, the world’s largest economy and holder of the world reserve currency (the US dollar) naturally have the biggest market impact. The most widely watched is probably the non-farm payrolls report, which shows the number of new jobs created in the US that month and is released the first Friday of every month.
Please note that the economic indicators discussed here should not be construed as investment advice.
Economic reports from the USA, the world’s largest economy and holder of the world reserve currency (the US dollar) naturally have the biggest market impact. The most widely watched is probably the non-farm payrolls report, which shows the number of new jobs created in the US that month and is released the first Friday of every month.
Please note that the economic indicators discussed here should not be construed as investment advice.
Economic indices and their significance
All major economies will produce inflation, employment, interest rates, and GDP reports, of some kind. But leading stock indices are also representative of a given country.
If the national currency rises, so too would national indices, as they are often purchased in that currency. However, stating that an index will rise if the native currency rises is a gross oversimplification and far too linear in scope.
Given that equity plays such a huge role in investing, it stands to reason that major indices have a huge global impact. Such indices are used as regional benchmarks for a country; both the currency and the leading indices can be used to compare one region to another.
If the national currency rises, so too would national indices, as they are often purchased in that currency. However, stating that an index will rise if the native currency rises is a gross oversimplification and far too linear in scope.
Given that equity plays such a huge role in investing, it stands to reason that major indices have a huge global impact. Such indices are used as regional benchmarks for a country; both the currency and the leading indices can be used to compare one region to another.
Stock indices as important economic signals
Some of the most influential economic indices globally are the stock indices for the major economies and include the S&P 500 (USA), FTSE 100 (UK), and Nikkei 225 (Japan). The Dow Jones Industrial Average (DJIA), another key index, captures the performance of major U.S. corporations.
Index | Region | Description |
S&P 500 | USA | Tracks 500 large-cap U.S. companies, representing a broad measure of the U.S. economy. |
FTSE 100 | UK | Covers the 100 largest companies on the London Stock Exchange, a key measure of the UK economy. |
DJIA | USA | Includes 30 major U.S. companies across various sectors, reflecting overall market sentiment. |
Nasdaq | USA | Focuses on over 3,000 companies, with a strong emphasis on technology and growth sectors. |
Nikkei 225 | Japan | Tracks 225 leading companies on the Tokyo Stock Exchange, serving as a key benchmark for Japan’s stock market and economy. |
Examples of other economic indices
- Producer Price Index (PPI): Measures price changes from the perspective of producers.
- Purchasing Managers’ Index (PMI): Reflects manufacturing and service sector activity.
- Leading Economic Index (LEI): Combines multiple indicators to forecast future economic trends.
Economic indices are critical tools for understanding the state and direction of the economy, guiding decision-making in policy, investment, and business strategy.
How to use economic indices for analysis
Economic indices can help investors analyse market trends and make informed investment choices. For example, changes in stock indices may signal growth or recession patterns, while a rising CPI indicates inflation pressures, suggesting a potential impact on spending power.
By observing multiple indices together, investors gain a more comprehensive view of economic conditions. Strategies can be tweaked and adjusted based on multi-index observation.
By observing multiple indices together, investors gain a more comprehensive view of economic conditions. Strategies can be tweaked and adjusted based on multi-index observation.
Trading with economic indicators
From a trading perspective, strategies can get very intricate. Traders place orders based on how they believe data will be interpreted by the wider market, as opposed to the fundamentals of the information itself.
It all depends on whether the information is priced into the market or not. It is of no use acting on information that other people have already acted upon. A large part of investing success means spotting patterns others fail to see and acting before other participants.
It all depends on whether the information is priced into the market or not. It is of no use acting on information that other people have already acted upon. A large part of investing success means spotting patterns others fail to see and acting before other participants.
How traders use economic data
Traders rely on economic data to make informed decisions, as it provides insight into the health of markets and economies. Key reports — such as GDP growth rates, unemployment figures, inflation rates, and interest rate changes — offer signals about future price movements.
Positive data, like strong GDP or employment growth, can indicate economic expansion and trigger demand for assets like stocks. Weak economic data may lead to caution and risk aversion, prompting traders to shift towards safe assets such as gold or bonds.
The latest real life economic indicators and statistics
The following tables outline major economic indicators for the USA, Eurozone, and the UK. Statistics are sourced from the relevant central bank, statistics office, and/or government department.
Economic Zone | Economic Indicator | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 |
USA | Interest rate | 1.75% - 2.5% | 0.25% - 1.75% | 0.25% | 0.25% - 4.5% | 4.5% - 5.5% | 4.5% - 5.5% |
USA | Unemployment rate | 3.5% - 4% | 3.5% - 14.9% | 3.9% - 6.4% | 3.5% - 4% | 3.4% - 3.8% | 3.7% - 4.2% |
USA | CPI (YoY) | 1.5% - 2.3% | 0.1% - 2.5% | 1.4% - 7% | 6.5% - 9.1% | 3% - 6.4% | 2.4% - 3.5% |
USA | GDP (YoY) | 2.6% | -2.2% | 6.1% | 2.5% | 2.9% | 2.8% |
Sources: US Interest Rate, US Unemployment Rate, US Inflation Rate, US Full Year GDP Growth, Federal Reserve Economic Data (FRED)
Economic Zone | Economic Indicator | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 |
Eurozone | Interest rate | 0% | 0% | 0% | 0% - 2.5% | 2.5% - 4.5% | 3.15% - 4.5% |
Eurozone | Unemployment rate | 7.4% - 7.9% | 7.2% - 8.6% | 7% - 8.3% | 6.7% - 6.9% | 6.5% - 6.7% | 6.2% - 6.5% |
Eurozone | CPI | 0.7% - 1.7% | -0.3% - 1.4% | 0.9% - 5% | 5.1% - 10.6% | 2.4% - 8.7% | 1.7% - 2.8% |
Eurozone | GDP | 1.6% | -6% | 6.3% | 3.5% | 0.4% | 0.9% |
Sources: Euro Area Interest Rate, Euro Area Unemployment Rate, Euro Area Inflation Rate, Euro Area Full Year GDP Growth, European Central Bank (ECB), Eurostat
Economic Zone | Economic Indicator | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 |
UK | Interest rate | 0.75% | 0.1% - 0.75% | 0.25% | 0.25% - 3.5% | 3.5% - 5.25% | 4.75% - 5.25% |
UK | Unemployment rate | 3.9% - 4% | 4% - 5.3% | 4.2% - 5.3% | 3.6% - 4.1% | 3.8% - 4.3% | 4% - 4.4% |
UK | CPI | 1.3% - 2.1% | 0.2% - 1.8% | 0.4% - 5.4% | 5.5% - 11.1% | 6.3% - 10.4% | 1.7% - 3.4% |
UK | GDP | 1.6% | -10.3% | 8.6% | 4.8% | 0.4% | 0.9% |
Sources: UK Interest Rate, UK Unemployment Rate, UK Inflation Rate, UK Full Year GDP Growth, Bank of England (BoE), Office for National Statistics (ONS)
Economic indicators can be misleading if they are not fully understood. Data may be neatly presented and derived from official sources, but interpreting the information and then acting appropriately on it is an entirely different matter.
For instance, the tables above only offer aggregate figures for large economic areas. Each metric needs to be drilled down into subcategories for any real insights. And there can be different reasons attributable to an increase or decrease in a given metric. An obvious example here would be the COVID crisis that began in 2019.
Past performance doesn’t guarantee future results.
For instance, the tables above only offer aggregate figures for large economic areas. Each metric needs to be drilled down into subcategories for any real insights. And there can be different reasons attributable to an increase or decrease in a given metric. An obvious example here would be the COVID crisis that began in 2019.
Past performance doesn’t guarantee future results.
Recap
Remember, all figures are open to interpretation and can be distorted. The GDP, for example, might not be an accurate reflection of the true economic activity of an average person or family, especially when there is a wide income gap between rich and poor.
Indicators are by their nature only indicative of something, they are not something by themselves. They need to be investigated under the hood to see what is really happening. This is where intelligent investors can avail of real insights instead of broad aggregates.
A good rule of thumb would be to not rely on any indicator until you understand all of the composite components and how data is collected, sorted, and represented.
Indicators are by their nature only indicative of something, they are not something by themselves. They need to be investigated under the hood to see what is really happening. This is where intelligent investors can avail of real insights instead of broad aggregates.
A good rule of thumb would be to not rely on any indicator until you understand all of the composite components and how data is collected, sorted, and represented.
FAQ on Economic Indicators
Q: What are the 3 types of economic indicators?
Economic indicators are classified into three main types: leading, lagging, coincident, and lagging indicators. Leading indicators predict future economic activity while lagging indicators confirm trends after they have begun. Coincident indicators reflect the current state of the economy, and lagging indicators change only after the economy has begun following a particular trend.
Q: What are the 6 key macroeconomic factors?
The six key macroeconomic factors are GDP growth, inflation, interest rates, unemployment, fiscal policy, and monetary policy. GDP shows the economy’s overall size and health. Inflation measures price increases. Interest rates affect borrowing and investment. Unemployment reveals labour market health. Fiscal and monetary policies impact spending and money supply, respectively.
Q: What is a better economic indicator than GDP?
Gross National Income (GNI) or Gross Domestic Product per capita can sometimes better reflect economic conditions. While GDP measures the total economic output within a country, GNI includes income from abroad, providing a broader view. GDP per capita shows average output per person, which can offer insight into citizens’ living standards.
Q: Is the CPI a leading indicator?
No, the Consumer Price Index is generally considered a lagging indicator. It measures the average change in prices over time for goods and services, indicating inflation. Since it reflects past economic conditions, CPI doesn’t predict future trends but confirms ongoing inflationary or deflationary pressures in the economy.
Q: What causes inflation?
Inflation is driven by demand-pull factors, cost-push factors, and monetary influences. Demand-pull inflation happens when demand for goods or services outstrips supply. Cost-push inflation occurs when production costs rise. Lastly, when too much money circulates in the economy, purchasing power can decrease, pushing up prices.
Learn how to invest during inflation
Learn how to invest during inflation
