Economic Indicators And What It Means For You

If the economy is operating ef­ficiently, wage earnings would in­crease regularly to keep up with the average cost of living. When wages or income drops, however, it is a sign that employers are either cutting pay rates, lay­ing workers off, or reducing their hours.
02 Mar 2019 13:40
Economic Indicators And What It Means For You
Shoran Devi

In this ever-evolving tech-savvy environment, we all are trying to beat the other to make the most of the dollar we have today.

This is getting increasingly dif­ficult with the complexities of our modern day finance market and with the influx of information we are being subjected to.

Making an inference from the load of mixed information is cer­tainly a challenge to most of us.

Therefore, knowing which indica­tors to look out for and how to in­terpret that data is what differenti­ates a successful investor from the others.

Keeping a close watch on impor­tant economic indicators can give you an idea of where the economy is headed so you can plan your fi­nances and even your career ac­cordingly.

There are generally two types of market indicators – Leading In­dicators and Lagging Indicators. Leading indicators have the poten­tial to forecast where an economy is headed to while the Lagging in­dicators indicate how the economy changes over time and can help identify long-term trends.

Some of the closely monitored lagging economic indicators are:

Changes in the Gross Domestic Product (GDP)

GDP is considered to be one of the most important measures of the economy’s current health.

GDP measures the total value of goods and services produced with­in a country.

An increase in GDP portrays a strong economy.

If the country is producing more goods and services, then additional workers are employed, more ser­vices and manufacturing products are consumed, and potentially more profits are generated for shareholders.

Hence, has a positive impact on the growth potential of an econo­my.

GDP enables the economic watch­ers and central banks to determine whether the economy is contract­ing or expanding and whether the monetary and fiscal policy needs any realignment to ward off any potential risks such as inflation or recession.

Also, the GDP data has finer de­tails on the output produced by in­dividual sectors.

This is very useful for investors seeking to diversify their portfolio. Investors can potentially use these data in extrapolating how an in­dividual sector is performing and make their investment decision ac­cordingly.

Consumer Price Index (Inflation)

The Consumer Price Index (CPI) reflects the increase in cost of liv­ing or inflation and is measured by the annual percentage change in consumer prices.

A high rate of inflation erodes the purchasing power of a currency with the decline in average stand­ard of living. Inflation also affects other factors, such as decrease in the employment rate and GDP.

The central banks uses inflation data to set interest rates.

If the inflation rate is higher than the target rate for the central bank, then the central bank may increase interest rates to try to subdue it. Conversely, if it thinks inflation is likely to be below the target rate, it may cut interest rates. Hence, in­flation is a crucial factor in deter­mining the rates banks charge for mortgages and the rates they offer on savings accounts. This in turn affects the consumption pattern and assists the investors in making relevant investment decisions.

Unemployment Rate

Unemployment Rate measures the number of people looking for work as a percentage of the total labour force.

Unemployed workforce reflects the loss of wages and loss of con­tribution to the economy in terms of the goods or services that could have been produced and so depicts the underutilization of the labour capacity.

Unemployment Rate has ripple ef­fect in the economy and is highly sought data for developed econo­mies.

Principally, more people with jobs represents higher economic out­put, retail sales, savings and corpo­rate profits.

A stable Unemployment Rate does not put undue pressure on infla­tion—upward or downward, the very kind of certainty an astute investor seeks.

Income and Wages

If the economy is operating ef­ficiently, wage earnings would in­crease regularly to keep up with the average cost of living.

When wages or income drops, however, it is a sign that employers are either cutting pay rates, lay­ing workers off, or reducing their hours.

Declining income can also reflect an environment where invest­ments are not performing.

Hence, a crucial information to investors when making investment decision.

Some of the important leading economic indicators which moves markets and hence are closely monitored by financial market par­ticipants are:

Manufacturing Activity

Manufacturing Activity is a strong indicator of the state of the economy.

This is mainly because Manufac­turing Activity has a direct rela­tion to the Gross Domestic Product (GDP) of an economy.

If the Manufacturing Activi­ties increase, it suggests strong demand for consumer goods and hence reflects a healthy economy.

Since manufacturing require la­bour force as well, an increase in Manufacturing Activity indicates possible increase of employment and probably at better wage rates.

Retail Sales

Retail Sales data are read together with the Manufacturing Activity and Inventory Level data.

Being a component of GDP, any growth in Retail Sales directly in­creases GDP.

When a company’s sales increas­es, they can hire more employees to sell or produce more goods which in turn increases employment and hence income levels.

In general, an increase in Retail Sales indicates an improving econ­omy.

Inventory Levels

Similar to Retail Sales, Inventory Levels are also read with Manufac­turing Activities data.

A high reading of Inventory Lev­els may determine two possible scenarios – either there is fall in consumer demand for the goods or the demand for the goods are ex­pected to increase.

If the demand for consumer goods are falling, the Inventory Levels would start to build up and may reflect a contracting economy. In the second possible reasoning, an increase in Inventory Level may indicate that businesses are pur­posely building up on their stock piles to cater for an expected surge in consumer demands.

If the consumer demand increas­es as expected then business with adequate stock piles can meet the demand and thereby increase their profit.

This is usually measured by an important indicator known as the Business Confidence Index.

Building Permits

Building Permit data are widely used as a direct measure of con­struction industry.

The housing market is generally seen as one of the first economic sectors to rise or fall when econom­ic conditions improve or worsen, and housing permits and starts can be early indicators of activity in the housing market.

An increase in housing starts can have a ripple effect through the economy such as creating more jobs in the construction sector or increased demand for products that these home buyers will need such as household appliances.

Therefore, generally an increase in these data would reflect strong consumer confidence and hence improving economy.

Businesses, investors, policy mak­ers, Government closely monitor these key indicators to gauge how the economy is performing. NGO’s and donor agencies also follow such data as it has implications on their work.

In Fiji, the Fiji Bureau of Statis­tics and the Reserve Bank of Fiji are the two agencies that provide such data for the consumption of general public.

However, it is important to note that such key indicators must not be seen in isolation.

As an active investor, it is impor­tant to employ these economic and financial indicators in your invest­ment model, however, the need to exercise good judgement cannot be stressed enough when making any investment decision.


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