Business Cycle and Economic Indicators

Economic Indicator Types

Economic indicators are divided into three categories: leading indicators, lagging indicators, and coincident indicators.

• Leading: Predict future economic shifts. They're particularly valuable for forecasting short-term economic changes since they frequently shift before the market does. Essentially, leading indicators are economic activity metrics whose shifts can indicate the start of a business cycle.

• Lagging: While leading indicators indicate the start of an economic cycle, lagging indicators affirm it. These are indicators that appear following an economic change or shift. They're most useful when they're utilized to verify specific patterns. The patterns themselves can be used to create economic projections, however the lagging indicators on their own are unable to be utilized to anticipate economic change directly.

• Coincident: Coincident indicators are cumulative gauges of activity within the economy that fluctuates with the business cycle. As a result, these indicators aid in the identification of business cycles. Since they occur simultaneously with the shifts they indicate, coincident indicators supply useful information on the current economic situation in a certain area.

Economic Indicators Examples

There are many examples of economic indicators, and each of them can be grouped into one of the three types - leading, lagging, and coincident.

Leading Economic Indicators

The stock market and manufacturing are two examples of leading economic indicators.

Stock Market

Whilst the stock market isn't exactly a reliable leading indicator, it is the one many people tend to check out first. Earnings forecasts may be inaccurate, and the stock market itself is susceptible to manipulation. It can sometimes provide misleading results and projections for the economy's future. An economic collapse could occur if investors overlook underpinning economic indicators and market prices rise without support.

Manufacturing

Orders for durable products are a gauge of production activity. Commodities that aren't switched out for newer versions for at minimum a couple of years are referred to as durable goods. An example of this would be desktop computers. A rise in durable goods orders is often regarded as a marker of economic stability, whereas a drop could suggest economic instability.

Lagging Economic Indicators

Income, unemployment, consumer price index (CPI), interest rates, gross domestic product (GDP), and currency are all examples of lagging economic indicators.

Income

Income is a lagging indicator. Salaries must rise along with the median living costs to ensure that the economy is functioning correctly. When incomes fall below the median living costs, it suggests that firms are cutting jobs, lowering rates of pay, or decreasing workers' hours. Various variables, such as age, sex, educational background, and race, are used to give a better idea as to how incomes are dispersed. They may reveal how particular groups' incomes fluctuate over time.

Unemployment

The amount of employment gained or lost is a major indicator of the health of the economy. When firms hire more people, it indicates that they are doing well. Increased hiring could also result in assumptions that additional individuals will have additional income to purchase commodities because there will be more people working. When unemployment levels increase suddenly or diminish more slowly than normal, it can lead to a fall in stock values since it suggests that firms are financially unable to hire more workers.

CPI

Consumer Price Index (CPI) analyzes fluctuations in the prices paid by buyers for products and services over a given month. It's basically a gauge of changes in the cost of living. It serves as an indicator of inflation in terms of buying products and services, and is one of the clearest predictors of inflation in the United States.

Interest rates

Interest rates rise as the central bank rate rises. Rise and falls are caused by various economic and market circumstances. Borrowers become more hesitant to seek out loans if interest rates rise. Consequently, consumers are less likely to take on debt and firms are less likely to expand, which results in GDP growth possibly becoming stagnant. In the case that interest rates have gone down too much, then that can result in a spike in money demand and inflation.

GDP

Gross Domestic Product (GDP) is one of the earliest metrics used to assess an economy's health. It denotes economic output and growth, as well as the level of economic activity. When the GDP rises, it means that firms are making more of a profit. It also implies that the country's citizens will have a higher living standard. If GDP falls, it means the opposite is true.

Currency

Whenever a nation's currency is strong, it has more power in terms of buying and selling with other countries. With strong currency, a country can purchase goods for less money and sell them for more money in other countries. But if the country has weak currency, it attracts more visitors and entices other countries to purchase its commodities seeing them as less expensive.

Coincident Economic Indicators

Consumer spending and Producer Price Index (PPI) are examples of coincident economic indicators.

Consumer spending

Increases in consumer expenditure frequently come right before higher CPI numbers, while drops in spending could heighten fears of a recession. This increase and drop in consumer spending can directly affect the market.

Producer Price Index (PPI)

PPI measures price fluctuations across practically all product-manufacturing industries. PPI is significant since it is the first gauge of inflation provided each month. It catches pricing changes at the base level before they emerge at the retail stage.

Key Economic Indicators Definition

Key economic indicators are indicators that give us a solid idea of how well the economy is performing overall. These are the ones that the government focuses on and watches the most. The key indicators in the U.S. that are most kept an eye on are: GDP, unemployment, and CPI. These key economic indicators vary together with the business cycle and therefore serve as a guide as to which point of the business cycle the economy is currently at.

Business Cycle Definition

The business cycle is the movement between market crises (recessions) and economic growth (expansions). During recessions, the rate of unemployment increases rapidly and during recoveries usually drops. Despite the fact that highs and lows appear to be unavoidable, the majority of economists believe that macroeconomic research has led strategies that have helped balance the business cycle and stimulate economic stability.

Business Cycle Graph

The business cycle graph depicts how a country's overall output in the economy and employment fluctuate over time. Figure 1 below depicts the four long-term stages of an economy: expansion, peak, contraction, and trough.

Fig. 1 - Business cycle diagram

The business cycle consists of different phases and turning points each reflecting the occurring changes in economic variables such as GDP, employment and the price level. It is important to understand that these economic variables are facing the occurring changes from the business cycle but also are the reason for those changes within the business cycle itself.

The next stage of the business cycle is the peak. This is the highest level of economic growth that the economy can attain. Prices have likewise reached their apex at this point.

Contractions are the periods of falling economic growth which culminate in the troughs. Underemployment, falling economic growth, and poor sales due to diminished demand are all common features of contractions.

Prolonged periods of contraction can lead to a negative economic growth, which could lead to a recession. In the case that the recession worsens and economic activity stays underneath the trend line for prolonged periods of time, the country will be in a depression. Recessions and depressions are particularly bad as the economy's output and growth are continuing to decrease. Moreover, unemployment rises, productivity drops even further, and trade and business drop as well.

The trough is when the economy is at its lowest point relative to the trend growth rate. The rate of economic growth is in the negatives. But there is a good side to this: the trough is as bad as it gets, meaning it can only go up from here. A trough usually precedes a recovery period where the economy begins its expansion phase again.