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Why is economic indicator

If you have no idea what CPI, PMI, or ECI mean, then you are like most beginning
investors. Let me explain these and a few others terms to enhance your knowledge
of indicators that affect your investments.

Economic indicators are used by the Federal Reserve to monitor inflation. When
they reflect inflationary pressure, the Fed will increase interest rates. Conversely,
when they show signs of deflation, a decrease of interest rates becomes imminent.

Interest rates are important for the economy because they influence the willingness
of individuals and businesses to borrow money and make investments. An
increase of interest rates will cause a downturn in the economy, while a decrease
will fuel an expansion.
To understand economic indicators, we must understand the ways in which economic indicators differ. There are three major attributes each economic indicator has:

Three Attributes of Economic Indicators

  1. Relation to the Business Cycle / Economy Economic Indicators can have one of three different relationships to the economy:
    1. Procyclic: A procyclic (or procyclical) economic indicator is one that moves in the same direction as the economy. So if the economy is doing well, this number is usually increasing, whereas if we're in a recession this indicator is decreasing. The Gross Domestic Product (GDP) is an example of a procyclic economic indicator.
    2. Countercyclic: A countercyclic (or countercyclical) economic indicator is one that moves in the opposite direction as the economy. The unemployment rate gets larger as the economy gets worse so it is a countercyclic economic indicator.
    3. Acyclic: An acyclic economic indicator is one that has no relation to the health of the economy and is generally of little use. The number of home runs the Montreal Expos hit in a year generally has no relationship to the health of the economy, so we could say it is an acyclic economic indicator.
  2. Frequency of the Data In most countries GDP figures are released quarterly (every three months) while the unemployment rate is released monthly. Some economic indicators, such as the Dow Jones Index, are available immediately and change every minute.
  3. Timing Economic Indicators can be leading, lagging, or coincident which indicates the timing of their changes relative to how the economy as a whole changes.

    Three Timing Types of Economic Indicators

    1. Leading: Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future.
    2. Lagged: A lagged economic indicator is one that does not change direction until a few quarters after the economy does. The unemployment rate is a lagged economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts to improve.
    3. Coincident: A coincident economic indicator is one that simply moves at the same time the economy does. The Gross Domestic Product is a coincident indicator.
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