Economic Indicators
Economic indicators are statistics that measure the health and direction of the economy. They are classified into three categories based on their timing relative to the business cycle.
Leading Indicators
Leading indicators change before the overall economy shifts direction. They are used to predict future economic activity.
| Leading Indicator | Description |
|---|---|
| Building permits | New residential construction permits issued |
| Stock market prices (S&P 500) | Equity market performance |
| M2 money supply | Broad measure of money in circulation |
| New orders for consumer goods | Manufacturing orders for consumer products |
| Initial unemployment claims | New weekly filings for unemployment benefits |
| Manufacturing new orders (durable goods) | Orders for goods lasting 3+ years |
| Average manufacturing work week | Hours worked per week in manufacturing |
| Interest rate spread (10-year Treasury minus federal funds rate) | Yield curve slope |
Coincident Indicators
Coincident indicators change at the same time as the overall economy. They confirm where the economy currently stands.
| Coincident Indicator | Description |
|---|---|
| GDP | Total value of goods and services produced |
| Industrial production | Output of factories, mines, and utilities |
| Personal income (less transfer payments) | Earnings from wages, salaries, and investments |
| Nonfarm payroll employment | Total employed persons (excluding farms) |
| Manufacturing and trade sales | Total sales in manufacturing and retail |
Lagging Indicators
Lagging indicators change after the economy has already shifted direction. They confirm the new direction of the economy.
| Lagging Indicator | Description |
|---|---|
| Average duration of unemployment | How long the average person stays unemployed |
| Corporate profits | Business earnings after expenses |
| Labor cost per unit of output | Wages relative to productivity |
| Consumer debt-to-income ratio | Outstanding consumer credit relative to income |
| Commercial and industrial loans | Bank lending to businesses |
| Consumer Price Index (CPI) (services) | Price changes in services sector |
| Prime rate | Rate banks charge their best customers |
Exam Tip: Gotchas
- Initial unemployment claims are a leading indicator, but the unemployment rate is a lagging indicator. The stock market is a leading indicator. GDP is a coincident indicator. CPI is a lagging indicator. The exam frequently tests which category each indicator falls into.
Gross Domestic Product (GDP)
- The total market value of all final goods and services produced within a country's borders in a given year
- GDP = C + I + G + (X - M) where C = consumer spending, I = business investment (capital expenditures), G = government spending, X = exports, M = imports
- The broadest measure of economic health
- A coincident indicator - reflects current economic conditions
- Real GDP adjusts for inflation; nominal GDP does not
- Two consecutive quarters of declining GDP = recession
Employment Indicators
- Unemployment rate - percentage of the labor force that is unemployed and actively seeking work (lagging indicator)
- Initial unemployment claims - weekly new filings for unemployment benefits (leading indicator)
- Nonfarm payrolls - monthly measure of total employed persons, excluding farm workers (coincident indicator)
Types of Unemployment
Unemployment is also classified by cause, not just by indicator timing. Each type behaves differently across the business cycle.
| Type | What Causes It | Business-Cycle Behavior |
|---|---|---|
| Frictional | Short-term transitions (people between jobs, new graduates searching) | Always present; least affected by recessions |
| Structural | Skills mismatch between workers and available jobs (technology shifts, industry decline) | Long-lasting; persists regardless of the cycle |
| Cyclical | Downturns in the business cycle (falling demand, layoffs) | Rises sharply during recessions, falls during expansions |
| Seasonal | Predictable seasonal patterns (agriculture, retail, tourism, construction) | Tied to the calendar, not the cycle |
Exam Tip: Gotchas
- During a severe recession, cyclical unemployment increases the most. It is the component directly tied to falling aggregate demand.
- The natural rate of unemployment is frictional plus structural (what remains at full employment). Cyclical unemployment is excluded, so "natural unemployment" is not itself a type.
Trade Deficit
- Occurs when a country's imports exceed its exports (negative balance of trade)
- Trade surplus occurs when exports exceed imports
- A persistent trade deficit can put downward pressure on the country's currency value
- Included in GDP calculation as (X - M) - net exports
Consumer Price Index (CPI)
- Measures the average change in prices paid by urban consumers for a basket of goods and services
- Published monthly by the Bureau of Labor Statistics (BLS)
- The primary measure of inflation
- Used to calculate real (inflation-adjusted) returns
- CPI is a lagging indicator (specifically CPI for services)
- The Fed uses CPI data to inform monetary policy decisions