Economic Indicators: Vital Signs Monitor Economy's Health

Government Finance Review, December 1991 | Go to article overview

Economic Indicators: Vital Signs Monitor Economy's Health


Five indicators provide the most significant reading on the health of state and national economies, and a measurement at any given time is less important than the trend of these values over time.

Newspaper readers and television watchers are bombarded by a bewildering amount of economic information. These statistics certainly seem important. The so-called "economic indicators" are subjected to intense scrutiny by economists and the media; Wall Street and world markets react to their movements, sometimes dramatically.

But while this barrage of statistics may be confusing at times, the situation isn't as complex as it may appear.

Economic indicators can be used to assess the state of the economy. Some, called coincident indicators, are a useful "snapshot" of current economic conditions. Others, the leading indicators, project the economy's likely future course. Still other indicators track special characteristics such as inflation.

Economic indicators are not "secrets" for the specialist, nor does the average reader need to follow hundreds of statistical reports. In reality, the shape and direction of the economy can be understood fairly well with only five indicators.

These five are nonfarm employment, which counts most wage and salary earners; industrial production, which measures the production of goods and services by manufacturing, mining and utilities companies; retail sales, which measures consumer spending; the leading indicators index, which can predict major economic shifts; and the consumer price index, which gauges inflation.

Coincident, leading, lagging. Many, though not all, indicators can be classed as coincident, leading or lagging.

Coincident indicators show changes in major categories of current economic activity, such as nonfarm employment and industrial production. These categories of statistics move in sync with the total economy. Th coincident indicators are so important that, in a sense, they are the economy. They provide the best picture of present economic conditions.

Leading indicators, such as help-wanted advertising and initial claims for unemployment, anticipate major economic trends. Changes in these indicators can sometimes predict which way the economy is headed.

For instance, if business conditions begin to worsen, many employers' first response is to stop hiring and lay off their newest or most expendable workers. These early measures cause a drop in help-wanted advertising and a rise in unemployment claims, signalling an economic downturn.

Lagging indicators, such as foreclosures and bank failures, reflect the past effects of an economic trend; they provide a clearer picture of where the economy has already been. These indicators can be used to confirm and analyze previous economic events, but not current ones. For example, the wave of bank failures and business foreclosures that continue to plague the Southwest is a result of the recession of several years ago, not a reflection of current economic conditions.

Still other indicators, such as the Consumer Price Index, relate only to specific features of the economy and are not classified as leading, lagging or coincident.

For all indicators, their actual value at any given time - such as total state or nationwide retail sales for a particular month - is less important than the trend of these values over time. For instance, the current level of employment is less significant than the fact that employment is rising of falling.

Unemployment Rate. The unemployment rate receives more media attention than nearly any other economic indicator. Ironically, economists consider unemployment to be relatively unimportant as a meaningful measure of the economy's current health.

This is because the unemployment rate, which measures the percent of the workforce that is out of work, is a lagging indicator. It follows, rather than anticipates, major changes in the economy, and therefore says little about current economic conditions.

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Economic Indicators: Vital Signs Monitor Economy's Health
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