Economic Analysis - II

Ravi (IBA)
Economic Indicators
• Economic environment goes through different stages or phases.
These sequential stages together are known as business cycle.
• The business cycle can be explained as a pattern of changing
economic output and growth:
• an initial period of rapid growth followed by a period of slow growth
or even stagnation after which the economy contracts shows a typical
business cycle.
• The peak is the end of expansion and trough occurs at the bottom of
recession.
Economic Activity – Business Cycle
 Types of Industries & Economy
• Different industries show varied performance as the economy moves
from one stage to another stage.
• Cyclical industries like producers of capital goods takes the hit when
economy goes through slow down but outperform other industries
during expansion.
• Defensive industries like food producers and pharmaceutical firms are
less sensitive to business cycle and do better compared to other
industries during recession.
 Cyclical Indicators
• Because of cyclical nature of the business cycle, the different phases
of business cycle can be predicted.
• Cyclical indicators help forecast, measure and interpret short-term
fluctuations in economic activity.
 Cyclical indicators
• The cyclical indicators are classified as below:
• Leading Indicators: Economic series that usually reach peaks or
troughs before corresponding peaks or troughs in aggregate economy
activity.
• Coincidence Indicators: Economic series that have peaks and troughs
that roughly coincide with the peaks and troughs in the business
cycle.
• Lagging Indicators: Economic series that experience their peaks and
troughs after those of the aggregate economy.
 Leading Indicator
• A measurable economic factor that changes before the economy starts to follow
a particular pattern or trend.
• Leading indicators are used to predict changes in the economy, but are not always
accurate.
• A leading indicator is an index, stock, report or other measurement that signals
the economy or market's direction in advance.
• The business cycle has highs and lows. That's why predicting what's around the
corner is one of the best (and most difficult) ways to protect and grow portfolios.
• Leading indicators, which are typically indices composed of a set of securities that
tend to be very sensitive to economic fluctuations and thus move sharply higher
during the early stages of expansion or lose value quickly when economic
conditions deteriorate, can provide that crucial information.
 Coincidence Indicators
• These indicators occur at approximately the same time as the
conditions they signify.
• In traffic light example, the green light would be a coincidental
indicator of the associated pedestrian walk signal. Rather than
predicting future events, these types of indicators change at the same
time as the economy or stock market.
• Personal income is a coincidental indicator for the economy: high
personal income rates will coincide with a strong economy.
 Lagging Indicators
• A lagging indicator is one that follows an event.
• In traffic light, the amber light is a lagging indicator for the green light
because amber trails green.
• The importance of a lagging indicator is its ability to confirm that a
pattern is occurring or about to occur.
• Unemployment is one of the most popular lagging indicators. If the
unemployment rate is rising, it indicates that the economy has been
doing poorly.
Some examples of leading / lagging /
coincident indicators