3 types of economic indicators

1. Leading Indicators : Variables that change before real GDP changes.

 Average Workweek:
Adjustments to the working hours of existing employees are usually made in
advance of new hires or layoffs, which is why the measure of average weekly
hours is a leading indicator for changes in unemployment. The more he/she
work, the more money he/she can get, as the money he/she get incresing, the
more he/she will buy things, and as the more he/she buy, demand is increasing
, and GDP get increase.
Example : Lia work overtime at her job. As the result, she got more money to
spend of. She buys her daily necessarity skin care more than before, means
that the demand for it increasing, and resulting in GDP increase.
 Unemployment claims:
Reports that counts people filing to receive unemployment insurance benefits.
For example : when more people file for unemployment benefits and fewer
people have jobs. Investors can use this report to gather pertinent information
about the economy, and predict whether the increasing number of
unemployment will resulting the decreasing real GDP or the decreasing number
of unemployment will resulting the increasing in real GDP.
 New consumer goods orders:
This component is considered a leading indicator because increases in new
orders for consumer goods and materials usually mean positive changes in
actual production. The new orders decrease inventory and contribute to unfilled
orders, a precursor to future revenue. We can expect that The more new
consumer goods demanded, the more revenue and profit will be gain by the
company. The Increasing profit will resultingin more expanding of the
company, the more company expand, the more spending, which resulting in the
increase in GDP.
 Delayed deliveries:
This component measures the time it takes to deliver orders to industrial
companies. Vendor performance leads the business cycle because an increase
in delivery time can indicate rising demand for manufacturing supplies. The
faster the materials reach the industrial company, the more product and the
faster product will be produced, which resulting in the more customer can buy
because of the availability of the products. The more it purchased, the more
profit will be gain and resulting in increasing in GDP.
 New orders for plant and equipment:
In this scenario, the more company invested to plants or equipments to boost
their production, the more product will be produced and sold to customer. In the
other hand, we can assume that the faster products will be available for whole
society which covers the needs, and the more it purchased, the more profit will
be gain, the more increasing number of producing and purchasing which
resulting in the increasing number of GDP.
 New building permits:
Building permits offer foresight into future real estate supply levels. A high
volume indicates the construction industry will be active, which forecasts more
jobs and, again, an increase in GDP.
 Stock Prices :
Though the stock market is not the most important indicator, it’s the one that
most people look to first. Because stock prices are based in part on what
companies are expected to earn, the market can indicate the economy’s direction
if earnings estimates are accurate.

For example, a strong market may suggest that earnings estimates are up and
therefore that the overall economy is preparing to thrive. Conversely, a down
market may indicate that company earnings are expected to decrease and that
the economy is headed toward a recession.

When there is a possitive earning that expected of economy, then it will

resulting in the increase rate of GDP. In contrast, Since individual stocks and
 the overall market can be manipulated as such, a stock or index price is not
necessarily a reflection of its true underlying strength or value.

Finally, the stock market is also susceptible to the creation of “bubbles,” which
may give a false positive regarding the market’s direction. But however, true
possitive either fake possitive but still giving assumption in the increasing of
GDP.
 Money Supply:
The money supply measures demand deposits, traveler's checks, savings
deposits, currency, money market accounts, and small-denomination time
deposits. Here, M2 is adjusted for inflation by means of the deflator published
by the federal government in the GDP report. Bank lending, a factor
contributing to account deposits, usually declines when inflation increases faster
than the money supply, which can make economic expansion more difficult.
Thus, an increase in demand deposits will indicate expectations that inflation
will rise, resulting in a decrease in bank lending and an increase in savings. Also
in the decreasing in GDP.
 Interest Rate:
The interest rate spread is often referred to as the yield curve and implies the
expected direction of short-, medium- and long-term interest rates. Changes in
the yield curve have been the most accurate predictors of downturns in the
economic cycle. This is particularly true when the curve becomes inverted, that
is, when the longer-term returns are expected to be less than the short rates.
When people don’t have money to spend because of lending,the GDP is
decreasing.
 Consumer expectations:
This component leads the business cycle because consumer expectations can
indicate future consumer spending or tightening. For example, to avoid the
expected increasing price of products in the future, the more people are buying
right away. Which make the increasing the number of demand, and resulting in
increasing in GDP.
2. Coincident Indicators : variables that change at the same time that real GDP changes.
 Non agricultural payrolls:
is a term used in the U.S. to refer to any job with the exception of farm work,
unincorporated self-employment and employment by private households,
nonprofit organizations and the military and intelligence agencies.
The major statistic reported from the nonagricultural payroll report is the
number of additional jobs added from the previous month. The report also
contains many valuable insights into the labor force that have a direct impact on
the stock market, the value of the U.S. dollar and the price of gold. The direct
in crease in those aspects resulting in the increasing in GDP, it also happed for
the reverse. The nonagricultural payroll report is an important tool used to
determine the overall health of the economy directly.
 Personal Income minus transfer payments
Personal income is the total income received by households that is available for
consumption, savings and payment of personal taxes. When it is minus with
transfer payments. Literally, it is depends on the amount of these aspects, if
Personal income is more than transfer payments, means that more money can
be use for spending or another purposes that should increase GDP. In contrast,
if transfer payments is categorized many when it is compared to our personal
income, our real income will be less than we can spend, so resulting in the
decreasing of GDP. Which we can know the result right away( directly)
 Industrial production.
As the amount of products that produced is many, the possibility to sell the
products is bigger and we can know directly that we will get much profit, which
will be resulting in the increasing of GDP.
 Manufacturing and Trade Sales:
Manufacturing activity is another indicator of the state of the economy. This
influences the GDP (gross domestic product) strongly; an increase in which
suggests more demand for consumer goods and, in turn, a healthy economy.
Moreover, since workers are required to manufacture new goods, increases in
manufacturing activity also boost employment and possibly wages as well.
 However, increases in manufacturing activity can also be misleading in the trade
sales. For example, sometimes the goods produced do not make it to the end
consumer. They may sit in wholesale or retailer inventory for a while, which
increases the cost of holding the assets. Therefore, when looking at
manufacturing data, it is also important to look at retail sales data. If both are
on the rise, it indicates there is heightened demand for consumer goods.
3. Lagging Indicators : variables that change after real GDP changes.
 Unemployment rate:
The unemployment rate is very important and measures the number of people
looking for work as a percentage of the total labor force. In a healthy economy,
the unemployment rate will be anywhere from 3% to 5%.

When unemployment rates are high, however, consumers have less money to
spend, which negatively affects retail stores, decrease in GDP, housing
markets, and stocks.
 Duration of Unemployment:
The number of weeks in which the unemployed, which those counted as such
by the Bureau of Labor Statistics, have been looking for a job. Unemployment
is often a lagging indicator. It takes time for firms to respond to decline in output
by getting rid of workers

For example,During a recession, the number of long-term unemployed

increases.
Even when the economy had recovered. It took late into the 1980s for
unemployment to fall in response to economic growth. However, after the 2008-
12 recession, unemployment fell quicker, making it less of a lagging indicator,
due to more flexible labour markets.
 Labor cost per unit output:
This number increases when factories produce far less per employee, due to
slower orders. The only way to reduce this number is to lay off workers or
produce more.
If the economy is operating efficiently, earnings should increase regularly to
keep up with the average cost of living, along with that, GDP will increase.
 When incomes decline, however, it is a sign that employers are either cutting
pay rates, laying workers off, or reducing their hours. Declining incomes can
also reflect an environment where investments are not performing as well,
which caused by decreasing in GDP.
 Consumer price index for services:
This is a part of the Consumer Price Index. Service providers may raise prices
at the beginning of a recession to maintain profit margins as demand falters.
Once the recession hits, they are forced to cut costs and lower prices. They may
keep cutting prices, even when the recovery has begun. Those that remain after
a recession are likely to continue lowering prices. They keep trying to gain more
business because it worked. They don't recognize when the recession is over.
And this is all caused by the decreasing of GDP.
 Commercial and Industrial Loans:
This is caused by the decreasing of GDP.This is a lagging indicator because
banks still have a lot of loans in the pipeline even after a recession starts.
Similarly, businesses that are losing revenue in the beginning stages of a
recession will take out loans to cover costs. Once the economy begins to
improve, it takes a while before banks have enough liquidity to start lending
again.
 Commercial credit to personal Income ratio:
After a recession, consumers cautiously hold off accumulating debt even though
their income starts to rise. Conversely, they will borrow more during a recession
to pay bills when they get laid off.
 Prime Interest Ratio :
Interest rates are another important lagging indicator of economic growth. They
represent the cost of borrowing money and are based around the federal funds
rate, which represents the rate at which money is lent from one bank to another
and is determined by the Federal Open Market Committee (FOMC). These rates
change as a result of economic and market events.

When the federal funds rate increases, banks and other lenders have to pay
higher interest rates to obtain money. They, in turn, lend money to borrowers at
higher rates to compensate, which thereby makes borrowers more reluctant to
take out loans. This discourages businesses from expanding and consumers
from taking on debt. As a result, GDP growth becomes stagnant.

On the other hand, rates that are too low can lead to an increased demand for
money and raise the likelihood of inflation, which as we’ve discussed above,
can distort the economy and the value of its currency. Current interest rates are
thus indicative of the economy’s current condition and can further suggest
where it might be headed as well.
When times are good, banks resist lowering rates and consequently, their
profits, even if business starts to slow. When times are bad, they resist raising
rates until they are sure the demand supports it.