Macroeconomic Indicators
What are Macroeconomic Indicators?
Macroeconomic indicators are defined as specific economic data points that help investors gauge the overall health of the economy and assess its current and future prospects. This information is typically released by central banks, statistics bureaus, and other government organizations. As an example, some popular indicators include employment data such as non-farm payrolls in the US; the Consumer Price Index (CPI), which gives perspective on inflation, and the Gross Domestic Product (GDP), which shows the rate of economic growth.
Key Learning Points
- Macroeconomic Indicators are key pieces of statistical data that help economists and investors assess the outlook for the economy and make important decisions about investments and strategic or tactical asset allocation
- Indicators can be either leading (used to predict a trend) or lagging (which can confirm an already existing trend)
- There are also Coincidental Indicators, but they are included with lagging indicators because they occur simultaneously with or after an economic shift
- Since markets can move on the back of news about key macroeconomic indicators, releases are widely anticipated by the markets.
What are the Types of Macroeconomic Indicators?
Although macroeconomic indicators vary in their meaning and overall impact, there are two main types of indicators.
- Leading Indicators – these help investors gauge where an economy might be heading. As they represent the first stage of an economic cycle, policy makers such as central bankers typically use them when setting fiscal or monetary policy. Examples of leading indicators include interest rates and the yield curve.
- Lagging Indicators – as the name suggests, these indicators reflect the historical performance of an economy and are typically used to confirm if a trend is underway (for example a recession). Lagging indicators include gross domestic product (GDP), inflation, and employment figures.
Coincident Indicators are sometimes considered a third category, as they inform investors of what is happening in the present. However, they are generally included with lagging indicators because they are based on happenings during or after an economic change.
Source: IG
Examples of Macroeconomic Indicators
Leading Indicators
Leading macroeconomic indicators include:
- Interest Rates – Although lagging in nature as interest rates are based on a decision made by central banks as a result of an economic event, interest rates are considered a leading indicator since they are likely to trigger an economic shift
- Bond Yields – Bond yields are most notably used to gauge investor expectations about the economy. For example, an inverted yield curve (i.e. short-term bond yield higher than long-term bonds) is often viewed as a signal of slowing economic growth and future interest rate cuts
- Stock Market Performance – Changes in stock prices could reflect investor sentiment about future economic conditions, therefore stock market indices such as the S&P 500 are considered leading indicators
- Construction Permits – Investors use the number of building permits issued for both residential and commercial construction as a barometer of economic and business activity. For example, an increase in building permits suggests stronger growth prospects due to the expected future construction activity and investment
- Consumer Confidence – Measured by the Consumer Confidence Index (CCI), this indicates consumer expectations about the economy. For example, higher consumer confidence typically precedes a rise in consumer spending, hence stronger future economic growth
Lagging Indicators
- Gross Domestic Product (GDP) – is the monetary value of all goods and services produced in a country.– While it is mostly used to compare the strength of different economies, the GDP growth rate can also signal the health of an economy as two consecutive declines (often called a technical recession) could indicate that the economy is entering a downturn
- Consumer Price Index (CPI) – As a measure of inflation, it is a lagging indicator that reflects past changes in prices rather than predicting future inflationary trends
- Employment Data – The unemployment rate is one of the most useful lagging indicators as it can signal the overall health of the economy. A higher number of layoffs means that business is less optimistic about the future.
- Consumer Spending – It reflects past income and economic conditions. Consumers typically increase their spending during periods of economic growth as incomes rise and confidence improves
In addition, an example for a Coincident Indicator is the Industrial Production Index in the US, which is released monthly by the Fed and measures the output of manufacturing-based industries (including those producing goods for consumers and businesses).
What are the Key Economic Indicators in the UK?
The only key economic indicator that is released by the Bank of England is its base rate (or interest rate). The Bank’s Monetary Policy Committee (MPC), which is made up of nine individual members, is responsible for making decisions about the base rate. The MPC sets and announces its policy eight times a year, or approximately once every six weeks.
The other important economic data comes out from the Office for National Statistics (ONS) and includes data releases on (but not limited to)
What are the Key Economic Indicators in the US?
Unlike in the UK, the key US economic indicators are released by various institutions. Most notably, the Federal Reserve of the United States (The Fed) is responsible for setting interest rates. The Department of Labor releases various labor market data including Non-farm Payrolls (widely anticipated data about the number of jobs in the private sector and government agencies that is released on the first Friday of each month). Other important indicators include the GDP Growth Rate, released by the Bureau of Economic Analysis and consumer spending data from the Department of Commerce.
Why are Macro Indicators Important for Traders?
Macro indicators are crucial for traders as they provide insights into the economic landscape and also influence market trends and asset prices. This is why most fundamental analysis (a very detailed analysis of businesses’ financial accounts) usually incorporates macroeconomic analysis (a large-scale study that aims to understand overall performance of the economy).
By analyzing indicators like inflation rates or employment figures, traders can anticipate shifts in market sentiment, adjust their portfolio positioning accordingly, and capitalize on potential opportunities. Typically, the bigger the difference between traders’ forecasts and the actual figure, the more market volatility can be expected. It should be noted that traders have shorter-term investment horizon compared to most investors.
Examples of Macroeconomic Indicators
Access our list of popular and free resources for macroeconomic announcements that provide macroeconomic indicators and analysis in the free download section.
Conclusion
Macroeconomic indicators are crucial tools used by investors and traders to gain perspective into economic performance, trends, and potential risks and opportunities. They also guide policymakers in formulating effective monetary, fiscal, and regulatory policies to stabilize and stimulate economic growth. In addition, businesses rely on those indicators to assess market conditions, anticipate trends, and make decisions about their business strategy and resource allocation.
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