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Key Economic Indicators Economists have developed a set of indicators to aid in predicting when a recession is about to occur and when the economy is in one. Indicators should not be mistaken for predictors. They are simply forecasting tools, and like any forecast can be misleading. The index of leading indicators that is reported in the popular press shows our economy is still in an expansion. There are thirteen key Economic Indicators, and they fall into five major categories: National Output and Income; Orders, Sectoral Production, and Inventories; Consumer Spending; Housing and Construction; and Foreign Trade. (3) The first of the five major categories directly relates to measuring the growth of the U. S.
economy. National Output and Income consists of the Gross Domestic Product (GDP), Personal Income, and Corporate Profits measurements. GDP is the primary measurement of growth and measures the total amount of goods and services produced by governments, businesses, people, and property located within the United States. Both real (adjusted for inflation) and nominal (current value in dollars) data is collected for computing the GDP. The GDP is normally reported as an annualized quarter-to-quarter change. Personal Income is a measurement of total pretax income earned by individuals, non-profit organizations, and private trust funds. (5) It is expressed at an annual rate also.
The more Personal Income increases the greater the potential for the American people to spend and save money, which directly influences the growth of the U. S. economy. Savings rates generally go down in the months October through May due to Holiday spending (includes "paying off" credit cards). There are two methods in which Corporate Profits are reported by the government. "Tax-based" profits are derived from corporate tax returns, and "adjusted" profits reflect earnings from current production. Just as increases in Personal Income are vital to the growth of the U.
S economy, increases in Corporate Profits are just as important on an even larger scale. The greater the profits, the more potential for growth. This in turn has a direct effect on employment rates, spending, etc. (2) The three measurements that make up this major category are Durable Goods; Manufacturers's hip ments, Inventories, and Orders; and Manufacturing and Trade Inventories. Durable Goods measures the volume of orders place with U.
S. manufacturers for goods with a life expectancy of at least three years. These goods include primary metals, consumer hard goods, transportation equipment, military hardware, and machinery. (1) A large percentage of durable goods purchases in any given year give economists an idea of how many more durable goods will be purchased in the following year. These items don't break down as easily and are not consumed at the time of purchase, so it is unlikely that a consumer of durable goods will buy that same item again within three or more years.
This can affect the economy through the industries that manufacture and sell these items. If they stockpile too many durable goods, there will be more available than there is demand. As a result manufacturers will incur higher inventory costs, while the price for the items will drop because too many are available. This indicator can change if new models or new technologies are introduced that drives consumers to seek replacements for existing items, or if high unemployment or high inflation drives consumers to retain their existing durable goods. This is an indication of trends in consumer preferences for big-ticket items. (2) Manufacturers's hip ments, Inventories, and Orders are indicators due to being tied to consumer expectations and new orders for consumer goods, as well as inventory levels. Since this category includes durable and non-durable goods, it encompasses a large percentage of economic activity.
Manufacturers ship materials and maintain them in inventory based on the number of orders they anticipate they will receive. It also involves production workers, who are required to take in orders, maintain inventories and perform shipping functions. If there is a large degree of shipments and inventories to maintain, more workers are required. A decrease in orders, inventories and shipments can result in a decrease of personnel required. This affects the economy if unemployment results and potential consumers are unable to purchase as much as they would like. (4) If shipments are delayed, deliveries from suppliers may suffer because they don't have the raw materials on hand to fill requests. In turn, orders from the manufacturer can be slowed, resulting in customer dissatisfaction and order cancellations.
If orders are cancelled after the item is manufactured, then the manufacturer now has additional inventory to maintain, and they may have to hire additional workers or find additional inventory space. (1) This indicator can change as a result of consumer preferences, employment trends affecting the number of skilled workers available for hire, and governmental regulations that can affect methods of shipment. The Manufacturing and Trade Inventories report indicates the level of business stocks at the retail, wholesale, and manufacturing levels in book value terms. It is essentially a measure of finished goods, not raw materials. If there is a high level of inventory at the retail and wholesale level, this can indicate that consumers do not have sufficient disposable income.
This can lead to a downturn in the economy, or it can mean that prices are inflated. It can also mean that a shift in consumer preferences has occurred, e. g. preference for IBM computers versus Apple. (3) A high level of inventory at the manufacturing level indicates that orders are slow or the firm is overstocking inventory. Since inventory space is costly, poor inventory management can result in the need to expand warehouse storage and can result in a decrease of profit. Inventory surpluses at any level affects the economy when stores, wholesalers or manufacturers have to liquidate finished goods at less than the intended selling price, thereby reducing forecasted profit margin.
Changes in this indicator are driven by consumer demand and references, which can rapidly deplete inventory or cause inventory to stagnate, and technologies that streamline inventory management and control. Two of the thirteen principle economic indicators tracked by the Bureau of Economic analysis fall under the category of Consumer Spending. Consumer spending includes Retail Sales and Personal Consumption Expenditures. (2) The Retail Sales economic indicator measures the sales of retail establishments, adjusted for normal seasonal variation, holidays and trading-day differences, and is not annualized. Personal Consumption Expenditures economic indicator measures consumer spending for all goods and services in the economic market. These expenditures comprise approximately two-thirds of the total GDP. When viewed as a running average, nearly every quarter since 1995, Real Personal Consumption Expenditures have realized quarterly gains compared to each previous quarter. (1) With the recent increases in retail sales and the continued levels of Personal Consumption Expenditures there is no reason to doubt that our economy can continue its creditable levels of growth.
These levels of fiscal activity have been and will continue to keep funds moving regularly through the financial sector within the circular flow. Housing Starts and Building Permits are the economic indicator used to measure privately owned housing units started and privately owned housing units authorized by building permits. (2) These are considered good leading indicators of home sales and spending in general. Housing Starts are used to predict the residential investment portion of the GDP. Building Permits usually become Housing Starts in about three to four months.
Building Permits are also a component of the leading economic indicators index. Foreign trade is the economic indicator that measures our economy and GNP against those of other countries the U. S. trades with. The main factor that is tracked is the balance of trade; which is the difference between the value of goods and services a country imports, and the value of the goods and services it exports. This difference will produce what is known as a trade deficit (what occurs when imports exceed exports) or a trade surplus (exports exceed imports).
The flow of the world economy is constantly fluctuating. In order to know precisely what our country's global economic position is, foreign trade must be measured. (3) Words Count: 1, 336. Bibliography International marketing data and statistics. London, Euromonitor Publications Ltd, 1997. Financial and Trade Direction of trade statistics quarterly. Prepared by Real Sector Division, IMF Statistics Dept, 1999.
Direction of trade statistics. Washington, D. C. : International Monetary Fund, 1994. Direction of trade statistics.
Yearbook. Washington, D. C. : International Monetary Fund, 1997. Emerging markets: research, strategies and benchmarks.
Chicago: Irwin Professional Pub. , 1997.
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Research essay sample on Personal Consumption Expenditures International Monetary Fund
