Economic indicators are pieces of economic data that are used by investors to judge the overall health of the economy and make decisions on current and future trading opportunities. Any piece of data can be considered an economic indicator for a trader, but the most widely used pieces of data include: Consumer Price Index (CPI), Gross Domestic Product (GDP) and unemployment figures.
Fundamental analysis is a wide analytical discipline that is used by investors to analyze and determine the intrinsic value of a financial instrument, such as stocks or currencies. As a tool of fundamental analysis, understanding economic indicators can make a real difference to your trading performance.
Economic Indicators Definition
Economic indicators are macroeconomic numbers that provide investors with a long-term picture of the overall direction in which an economy is going, and help to determine in which currency or economic sector to invest.
Decision makers, such as central bankers and politicians, rely on economic indicators to adjust their policies and ensure that the economy is on the right track.
Types of Economic Indicators
In general, economic indicators can be grouped into lagging, coincident and leading economic indicators.
- Lagging indicators, such as inflation or interest rates, depend on the previous economic performance and are therefore lagging the current economic conditions.
- Coincident indicators, which include the GDP and labor statistics, are changing simultaneously with the change in economic activity.
- And finally, indicators that can be used to predict future economic performance are called leading indicators and include retail sales, building permits and net business formations, to name a few.
At this point, you might think that leading indicators are the holy grail of trading, but let’s see what are the leading economic indicators are supposed to predict. While specific macroeconomic numbers tend to have a predictive power of future economic activity, they’re closely watched by market participants around the world and are quickly discounted by the markets.
To take full advantage of leading indicators, traders need to follow a range of other variables to anticipate their value.
In fact, some analysts are known to count the number of free parking lots in shopping malls during holidays to predict the value of retail sales – a key leading economic indicator that has a large impact on the GDP.
Economic Indicators Examples
Indicators of Economic Growth – GDP and GNP
The gross domestic product (GDP) is the most comprehensive economic indicator available to traders. The GDP includes the value of all finished goods and services inside a country, within a specific time period – usually quarterly and yearly. The gross national product (GNP), on the other hand, includes the value of all goods and services produced by the means of production owned by the countries residents.
Example: Cars produced by a Toyota plant in the United States are added to the gross national product of Japan, but not to its gross domestic product.
In the United States, the GDP is published quarterly by the Bureau of Economic Analysis in three stages, called the advance report, preliminary report and final report. The advance report, as it name suggests, is the first GDP release that is published one month after the quarter ends and has a larger impact on the markets than the other two reports.
Indicators such as the gross domestic product tend to have a diminishing impact on the markets in the recent years, perhaps because other indicators are used to predict the future economic activity of a country before the GDP report is released.
The employment situation is one of the most important economic indicators and has a significant impact on the markets. Traders around the world watch closely on the first Friday of each month, when the US Bureau of Labor Statistics releases its employment report.
The report includes a number of employment indicators, the most market-moving of which are the non-farm payrolls (NFP), the average hourly earnings and the unemployment rate.
Inflation refers to the change in the price of goods and services within a specific period of time. Central banks around the world, including the Fed, are closely following the inflation rate in their economy in order to make changes to their monetary policy when necessary. That’s the reason why inflation rates are an important economic calendar to traders – they can be used to anticipate future monetary tightening or loosing performed by central banks.
Among the various economic indicators that measure inflation, the consumer price index (CPI) tends to be the most important. The CPI measures the change in the price of consumer goods and services on a retail level, and includes a basket of a few hundred items.
The retail sales report represents the total value of sales in the retail sector. Since the value of retail sales is highly correlated with personal consumption, which in turn accounts for the majority of economic activity in a developed country, retail sales are often used as a leading indicator to predict the future value of the GDP. Retail sales are released monthly by the US Department of Commerce.
A list of all economic indicators, regularly updated and grouped by category and country, can be found here.