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There are various economic indicators used by micro and macro economists alike. However, some indicators hold much more weight than others in terms of their effects on market performance and the overall health of the economy.
Let’s discuss five of the most important economic indicators in the sections below.
Gross Domestic Product (GDP)
Gross domestic product, or GDP, is a common measure of the size of an economy used by economists all around the world.
Typically, the size of an economy is measured in U.S. dollars and includes every transaction in goods and services made within an economy over a period of time, typically a quarter or a year.
Growth and contraction in GDP figures are good indications of the condition and future prospects of an economy, which directly affects asset prices on capital markets.
For example, if the United States economy is experiencing growth, the S&P 500, which is the benchmark equity index in the country, is also likely to attract more investors and enjoy capital appreciation.
Unemployment Rate
The unemployment rate is calculated as a percentage of the working-age population that is currently unemployed and also not in the process of actively looking for employment.
A high rate of unemployment may point to structural issues within the economy, which makes it difficult for a portion of the population to participate in the labor force and contribute to the economy.
Countries that have high unemployment are likely to stagnate in terms of economic growth and experience brain drain due to limited opportunities.
Such a scenario can be detrimental to a country, both economically, as well as socially.
Interest Rates & Monetary Policy
Interest rates and changes in monetary policy can greatly affect the capital markets. For example, when interest rates rise, fixed-income securities, such as bonds and bills, tend to become more attractive due to a higher annual yield and consistent payouts. When this happens, investors take some of their funds out of the stock market and buy bonds, which reduces the growth of stock market indices.
Conversely, when interest rates are low, the stock market is likely to be bullish, as cheap credit allows investors to buy up speculative stocks more easily.
Keeping track of the Federal Reserve’s meetings and decisions is important for anyone investing in the U.S. stock market.
Consumer Price Index (CPI)
The Consumer Price Index, or CPI, is a key economic indicator that measures the average change in prices paid by consumers for a basket of goods and services over time.
CPI is the primary method of measuring inflation and the strength of a currency.
A rise in CPI indicates inflation, suggesting increased costs for consumers, which can result in a gradual tightening of monetary policy, which, as we have already mentioned, directly affects the performance of capital markets.
Industrial Production
Industrial production measures the output of a country’s manufacturing sector. This data is especially important for countries with significant manufacturing capacity, such as the United States, Japan, Germany, etc.
When manufacturing output drops, this can lead to supply shortages around the world, as most countries that do not have developed manufacturing sectors, tend to trade with these countries and are heavily dependent on the import of goods manufactured in these countries.
A drop in manufacturing output can have major implications for trade balances between large economies and tilt geopolitical powers between major players.
Many governments tend to pay close attention to their manufacturing sectors, especially those that produce high value added products, such as vehicles, heavy machinery, household appliances, and niche specialty products.
