Introduction to Economic indicators

Economic IndicatorsOkay, I should pay attention to the business cycle, but how do I know which direction it is going in?... Trends in the economy which tell economists where the business

Economic Indicators

Okay, I should pay attention to the business cycle, but how do I know

which direction it is going in?

Economics Joke:

• There are only two economists in the

world know where the economy is going And they disagree!

If you were an economist, this would be

hilarious! For the rest of us, not so funny

But, it tells us one thing: economics is

unpredictable We can only guess at what is happening

Economic Indicators

• Predicting the business cycle is tricky

Often the economy does not do what

economists expect Looking at lots of

indicators give them a feel for what is

going on and an idea of how to prepare for the future

• Def Trends in the economy which tell

economists where the business cycle is

going and where it has been

Three Types of Indicators

Leading Indicators

(where the cycle is going)

Coincident Indicators

(where the cycle is now)

Lagging Indicators

(where the cycle has been)

Leading Indicators

• Def Economic activity that happens prior

to (before) a change in the economic

cycle

• These are predictors of where the

economy is going next: Expansion or

contraction

Leading Economic Indicators

Indicator

• Average weekly

initial claims for

unemployment

• Stock Prices

Significance

• Reflect layoffs and

new hires (more unemployment, contraction Less unemployment, expansion)

• Reflect Investor

attitudes (rise

=expansion, fall= contraction)

Leading Economic Indicators

(cont.)

Indicator

• Interest Rates

• Index of consumer

confidence (a survey

of how people feel

about the economy)

Significance

• Rates are lowered if

a recession is coming, raised if expansion.

• Reflects changes in

consumer attitudes about the future

Coincident Indicators

• Def Information that is used to measure

economic change as it happens

1 Total industrial production

2 Total industrial sales

3 Personal Income

4 Number of employees on industrial

payroll

Lagging Indicators

• Def Economic activity that change after

the business cycle expands or contracts

1 Interest rates banks charge on loans

2 Amount of money owed

Last Unit: 16+, not institutionalized,

temporarily laid off, and looking for work

• Unemployment Rate: def the percentage

of the labor force unemployed and actively looking for work

(remember, we don’t count people not

looking for work, “hidden unemployment”)

Types of Unemployment

• Frictional Unemployment

• Cyclical Unemployment

• Seasonal Unemployment

• Structural Unemployment

Frictional Unemployment

• Def People who are between jobs or just entering the workforce

– Ex High School/College graduates, people changing careers, etc.

• This is a normal kind of unemployment

Cyclical Unemployment

• Def Unemployment caused by changes in the business cycle during a contraction

phase Businesses lay off workers and the unemployment rate increases These

workers will find work when the business cycle moves to an expansion phase This

is a normal form of unemployment

Seasonal Unemployment

• Def Unemployment caused by natural changes in weather/season

– Ex Farming, construction, Darien Lake

workers, snow plowers, landscapers.

• When the season changes, they will get

their jobs back Another normal form of

unemployment

Structural Unemployment

• Def Changes in the economy that makes certain workers obsolete Their skills are

no longer needed

– Ex Business owners move the factory to

another country (outsourcing), robots replace assembly line workers

• This is a bad form of unemployment

These workers have a difficult time finding new jobs because their skills are not

needed Need to be re-trained for the new job market

• Def A general rise in prices due to a

decrease in the value of money

– Ex 5 years ago, a can of soda from a

machine cost $.75 Today it is $1.00 or more.

• Inflation is natural and even necessary

But when inflation increases too quickly, it has dangerous effects on the economy

(i.e people cannot afford to purchase

needs and wants)

Causes of Inflation

• Demand-Pull Inflation:

– When the demand for products exceeds the supply, prices rise Too many dollars, too few

the Business Cycle.

• Cost-Push Inflation:

– When scarcity causes the cost of production

to increase, prices rise Ex Gas prices

increase the cost of fuel for airplanes, so

ticket prices increase

Effects of Inflation

1 Price of goods rise (ex Can of soda)

2 Money buys less

3 Standard of living declines (ex More and

more households have two people

working to make ends meet)

4 People who save money are hurt (if

inflation is higher than investment

returns, losing money!)

Effects of Inflation cont.

• Inflation hits people with fixed incomes

(people with a set monthly income that will not increase) the hardest

– Ex Retirees and disabled people Their social security checks, pensions, or investments are

increase