An economic indicator is a metric useful in monitoring, assessing, and evaluating the overall macroeconomy state of health. If you are not familiar with the concept of macroeconomic, then let us discuss it here briefly:
Macroeconomics is s branch of economics associated with the economy’s performance, behavior, decision making, structure, and aggregation. It helps interpret the current or future investment possibilities by analysts.
Economic indicators are collected by private business intelligence organizations or Government agencies as per the surveys and census. The information that the agencies collect is further analyzed so that it can generate an economic indicator.
Economic indicators, in general, are anything that the investor chooses, and mostly the investors follow the specific pieces of data that the government and private business agencies releases. These indicators include:
- Figures of unemployment
- Gross Domestic Product
- The consumer price index and
- Price of Crude oil
A financial analyst needs to keep track of microeconomic indicators. The microeconomic indicators are a source of systematic rest as they affect the decline and growth of all industries. Let us know about some of the primary economic indicators for India here:
Gross Domestic Product is a primary indicator that is a vital part of the microeconomic performance. It is an economic indicator that shows the overall size and health of an economy. It is an absolute value, and the changes in GDP are measured as the growth in GDP.
The Gross Domestic Product has four components. They are:
- Net exports
- Government Expenditure
- and Consumption
The only country that doesn’t use GDP as a measure of economic integration is the kingdom of Bhutan. In this country, the use of the alternative of gross national happiness index as an economic indicator.
If we talk about the perfect measure of the economy, then we can say that it is not a perfect measure. The reason is the fact that GDP has its value depending upon the political definition.
Every country has its own rules and regulation when it comes to the economy. For instance, Italy has raised its economy by 1.3 % as it has introduced estimating the black market in its GDP calculation. With this rule, the Italian government gets more flexibility in terms of budgetary.
Similarly, the country EU has imposed a rule of indebtedness in the country. According to this law, the country should maintain a deficit following 3% of its GDP.
The GDP releases every three months and is not as frequent as other economic indicators, which gives it a disadvantage as a reliable economic indicator in India. For this reason, finance analysts use other highly productive value indicators to forecast the overall health and state of the economy.
Other Vital Economic Indicators:
The consumer Purchasing Index is an economic indicator that significantly affects a company’s performance and its asset. It is an economic indicator in India that is a crucial indicator for financial analysts. The inflation in this indicator erodes the nominal value of any asset that, in return, gets a higher discount rate. It is an economic indicator that is based on the principle of the Time Value of Money. As per this principle, the future cash flows are worthless in the present terms.
Financial analyst follows the consumer purchasing index to measure inflation. The formula of CP is as follows:
CPI = Basket PriceT÷ Basket Price0*100
Baskets in this scenario are mainly related to the purchased consumer products or services. The pricing of a basket refers to the price of a basket of products over time. If you want to find out the actual price, it is compared with the price over time to a base year.
CPI has different variants, and the core CPI is one without adding the price of food-related products and energy products. The prices of energy and commodity foods are excluded as these types of commodities experience high volatility in the prices. By removing these two items, it can help in measuring the CPI with stability.
Purchasing Manager’s Index is one of the most followed economic indicators in the US. The complete form of this economic indicator is the Institute of Supply Management’s Purchasing Managers Index. PMI survey is sent to different businesses worldwide of NAICS categories to collect information on the deliveries, production level, new orders, backlog, and employment.
The collection of the information helps forecast the confidence of all over the business with the economy and helps determine the expansionary or Contractionary outlook of the economy.
It is an economic indicator that has a strong correlation with the GDP, and also PMI was the first economic indicator released monthly. Both GDP and PMI are closely related to the investment component.
Leading and Lagging Indicators:
There are two types of Economic Indicators in India: Leading and Lagging. Some of the most common types of Leading indicators are:
- Inventory Balances
- Retail Sales Figures
- Stock Market Performance
- Building Permits and Housing Starts
- Level of Manufacturing Activity
Some of the Lagging indicators are:
- Unemployment Rate
- GDP Growth
- Income and Wage Growth/ Decline Corporate Profits
- Interest Rates
- Characteristics of the economic indicators:
An economic indicator usually possesses one of three attributes such as:
An indicator may have a characteristic of countercyclical under which it moves in the opposite direction concerning the economy. For instance, if the economy thrives, then the unemployment rate of the country also declines.
An indicator may have a characteristic of procyclical in which the economy and the indicator move in a similar direction. GDP is a procyclical indicator as it increases as per the economy’s performance and decreases if the economy is not performing well.
An indicator has a cyclical characteristic when it bears no relationship with the economy.
To conclude, it is right to say that studying Economic Indicators is helpful as it provides signs along the road. Suppose you want to get the best out of the economic indicators in India. In that case, you should utilize different indicators to combine them with a glean insight into different patterns and verification with the help of multiple sets of data.