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Economic Indicators
Concepts
 Variables that provide information about
the state of the economy.
 Every economic indicator has a story to
tell.
 Need to be able to make sense of the
entire picture.
GDP=C+I+G+NX
 Consumption:
 Retail sales
 Consumer credit
 Personal income and spending
 Employment report
 New claims for unemployment insurance
 Consumer confidence
 Auto sales
 Chain store sales
 Investment
 Nonresidential
 Industrial production
 Capacity utilization
 Orders for durable goods
 ISM surveys
 Factory orders
 Manufacturers’ shipments
 Investment
 Residential
 Housing starts
 New single-family home sales
 Existing home sales
 Mortgage applications
 Government
 Construction spending
 Federal budget balance
 Net Exports
 International trade
 Current account balance
Inflation
 Consumer price index
 Producer price index
 Employment cost index
 Non-farm productivity
 Unit labor costs
 Import and export prices
 Employer costs for employee
compensation
International Indicators
 German industrial production
 German consumer price index
 Japan Industrial production
 France monthly business survey
 OECD composite leading indicator
 China industrial production
 Other major countries’ industrial
production
Composite Indicators
 Indicator composed of various series.
 Bureau of Economic Analysis
 Organization for Economic Cooperation and
Development (OECD)
 National Bureau of Economic Research
 Private consulting firms
Cycle of the Indicator
 Leading indicator: used to predict changes in the
economy. Its trajectory changes before the economy
follows a particular pattern. i.e. Conference Board LI
 Coincident indicator: varies simultaneously with the
business cycle. It indicates current economic
conditions. i.e. industrial production
 Lagged indicator: follows the business cycle with
lags. It illustrates where the economy has been. i.e.
corporate profits
Understanding Economic Indicators
 Background Economic Theme: Recognize the stage of
the business cycle.
Hodrick-Prescott Filter (lambda=1600)
10800
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10000
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9600
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9200
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8800
8400
0
8000
-100
-200
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USAGDP
00
01
Trend
02
03
Cycle
04
Understanding Economic Indicators
 Identify their breath in coverage.
 Be aware of data revisions.
Handling an Economic Indicator
 Real vs. Nominal values
most professionals care about real values
Nominal vs Real
1000000
9000
900000
8000
800000
700000
7000
600000
6000
500000
400000
5000
300000
4000
200000
100000
95
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97
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99
00
01
M1 Nominal
02
03
04
3000
94
95
96
97
98
99
00
M1 Real
01
02
03
04
Handling an Economic Indicator
 Original vs. adjusted series
a) Trend – cycle
b) Seasonal adjustment
c) Moving Average
1800000
1700000
1600000
1500000
1400000
1300000
1200000
96
97
98
99
00
Adjusted
01
02
Original
03
04
Handling an Economic Indicator
 Growth rates
a) Month to month or Quarter to Quarter
b) Year to year
.020
.06
.016
.05
.012
.04
.008
.03
.004
.02
.000
.01
-.004
96
97
98
99
00
01
02
GDP Quarterly Change
03
04
.00
96
97
98
99
00
01
02
GDP Year to Year Change
03
04
Handling Economic Indicators
 Flows vs Stocks
1000000
100000
900000
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800000
60000
700000
40000
600000
20000
500000
0
400000
300000
-20000
200000
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100000
-60000
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M1 Stock
01
02
03
04
94
95
96
97
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00
M1 flow
01
02
03
04
Sample Report
GDP
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Published by: Bureau of Economic Analysis
Frequency: Quarterly
Period Covered: prior quarter
Volatility: Moderate
Market significance: very high
Web site: www.bea.gov
How do markets react?
GDP ↑ > Stock market ↑
GDP ↑ > Bond market ↓
GDP ↑ > Dollar appreciates
 Some details:
- best measure of economic activity
- 3 estimates every quarter:
a) Advance report: first month of the
quarter. It is based on consumption
information and some information on the
other components of GDP.
b) Preliminary report: second month of the
quarter, includes almost all information.
c) Revised (or final) report: third month of the
quarter, includes all information.
- The GDP report contains two estimates of real
GDP
1. Built from the final demand categories:
C+I+G+NX
2. Built from the income side:
Personal income and corporate profit
by construction 1 = 2
- The GDP report contains information about inflation:
1. Implicit deflator: measures a combination of price
changes and changes in the composition of GDP.
Not a pure measure of inflation.
2. Fixed-weight deflator: provides a measure of price
changes for a given basket of goods and services. It
is a pure measure of inflation.
3. Chain weighted price deflator: the index allows
the quantity of purchase-weights to vary over time.
Hence, real output is based on contemporaneous
spending patterns.
- Note that it is possible to use information on monthly
indicators to forecast GDP
EX. Personal consumption expenditures:
-Durable goods
-Non-durable goods
- Services
- Keys to interpreting the GDP report:
a) Pay close attention to inventory changes, the
behavior of inventories has significant implications
for future growth.
b) Focus upon the GDP chain-weighted price index
as the most comprehensive measure of prices in the
economy. It is a more comprehensive price indicator
than the CPI or the PPI.
c) Look at the pace of exports and imports. It has
implications for the exchange rate market.
d) Keep in mind that, traditionally, revisions to the
GDP figures have a significant impact on financial
markets.
DATA
Billions of current dollars
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
2005Q4
11457.1
11666.1
11818.8
11995.2
12198.8
12378
12605.7
12760.4
13000
12000
11000
10000
9000
8000
7000
6000
94
95
96
97
98
99
00
GDP
01
02
03
04
05
Forecast
2004Q1
11457.1
11156.28
2004Q2
11666.1
11361.65
2004Q3
11818.8
11544.5
2004Q4
11995.2
11734.3
2005Q1
12198.8
11919.73
2005Q2
12378
12097.7
2005Q3
12605.7
12294.43
2005Q4
12760.4
12485.73
2006Q1
12581.37
Discussion
 Based on the forecast provided by a
Moving Average, the value of GDP for the
first quarter of 2006 will be 12581.27
billions of dollars.
 That number would imply an increase of 3
percent.
 Hence, we can conclude that the economy
will continue expanding.