Economic Indicators

Economic Indicators

Economic indicators are signs, indexes, or measures of an event that can affect consumers, businesses, and governments. This information is provided by different sources: government statistics, bank reports, and corporate financial reports. Thus it is important to be able to read this information, to understand and interpret it. Moreover to understand their logic and measure its consequences, and know in which economic phase we are located.

The more the entrepreneur sees the signs in advance, the more he is able to prepare himself. Forward-thinking managers see downturns and economic downturns and are already planning recovery.

In our economic context, there are three main players: the consumer, the entrepreneur, and the government. So for each stakeholder, there are specific economic indicators.

Economic Indicators in Business

For the Consumer

For the consumer, the economic indicators that affect his behavior are illustrated in the following model:

The model is explained as follows: each box identifies an economic indicator. Also, each arrow represents an interaction between two economic indicators. The yellow boxes concern consumers directly, the green boxes the business leaders, and the orange boxes the government.

For example, a reduction in taxes will result in an increase in consumer disposable income and consequently an increase in consumer spending or savings. An increase in his salary or a decrease in prices or a decrease in the rate of inflation will produce the same effect. On the other hand, a price increase will produce an increase in the rate of inflation and a decrease in consumer spending.

For the Entrepreneur

For the entrepreneur, there are other economic indicators that relate more specifically to the company.

Let’s suppose, a decrease in consumer spending, and hence a decrease in retail sales will reduce the company’s profits. Actually, this will lead to a decrease in production, a decrease in investments, and layoffs. This continued decrease in sales may lead to bankruptcy (if it is too strong and lasts too long) and other layoffs. So these layoffs erase wages and help increase the unemployment rate.

Conversely, increases in sales help to increase profits, investments, hiring, and wages of employees and thereby lower the unemployment rate. Prices include prices for oil, metals, raw materials, products of companies, houses, and currency.

For the Government

The government, its role is to try to maintain a balance of power by keeping a reasonable level of taxes and duties. Moreover a minimum rate of inflation, moderate interest rates, and an acceptable exchange rate. Also, a rate of not too high unemployment and maintain GDP growth.

However, in practice, this balance is difficult to maintain, mainly because of the steady rise in government spending, which is putting upward pressure on the level of taxes and interest rates. These upward pressures are helping to reduce consumer spending and corporate profits. And of course, these decreases increase the unemployment rate.

Systemic Model

If we integrate all these economic indicators into a model, we obtain the systemic model of economic indicators in which we see that all the indicators are interrelated and influence each other, forming a continually moving system. What are the most important indicators? It depends on how you look at the model if we look at it from effects or causes. Some indicators are the results of other indicators while some indicators are the causes of other indicators.

For example, GDP is the ultimate result of all economic indicators including, among others, consumer spending, interest rates, the inflation rate, and the exchange rate. On the other hand, consumer spending is an index that affects many indicators such as business sales, profits or losses, investments, jobs or layoffs, and unemployment.

Business Cycle

There are four phases in an economic cycle: the peak, and the downturn. Also the trough and the expansion. In each phase, economic indicators behave differently.

The Top

We are at a peak when the following indicators are high:

• The prices
• The rate of inflation
• Interest rates

Slowdown

We are in a downturn when the following indicators decrease:

• GDP (Gross Domestic Product)
• Consumer spending
• Retail sales
• Corporate profits
• Inventories
• Business investment
• Residential construction
• Industrial production
• The industrial capacity utilization rate

And when the following indicators increase

• Layoffs
• The number of bankruptcies
• Unemployment rate

The Hollow

We are in a hollow, a recession, or an economic crisis when the following indices are high:

• The number of bankruptcies
• Unemployment rate

And when the following indicators decrease or are at their lowest level:

• The rate of inflation
• Interest rates
• The exchange rate

Also, the decrease in these last three indicators will contribute. Moreover to revive the economy.

The Expansion

We are in a period of expansion, of recovery, when the following indicators increase:

• GDP (Gross Domestic Product)
• Consumer spending
• Retail sales
• Corporate profits
• Inventories
• Business investment
• Residential construction
• Industrial production
• The industrial capacity utilization rate
• Hiring of manpower
• Government investments

Benefits from Economic Indicators

Economic indicators aid in the analysis of trades in the light of economic activities and the interpretation of market movements during these events. You don’t need specialized economics skills to use an economic calendar because not every data release needs in-depth analysis.

Thus you can predict market volatility and identify possible trading opportunities by tracking GDP indicators, for example, inflation and job strength. In fact, you should also be aware of which economic measures have the most effect on trading.