Economic Indicators
Okay, I should pay attention to the
business cycle, but how do I know
which direction it is going in?
Economics Joke:
• There are only two economists in the
world know where the economy is going.
And they disagree!
If you were an economist, this would be
hilarious! For the rest of us, not so funny.
But, it tells us one thing: economics is
unpredictable. We can only guess at what is
happening.
Economic Indicators
• Predicting the business cycle is tricky.
Often the economy does not do what
economists expect. Looking at lots of
indicators give them a feel for what is
going on and an idea of how to prepare for
the future.
• Def. Trends in the economy which tell
economists where the business cycle is
going and where it has been.
Three Types of Indicators
Leading Indicators
(where the cycle is going)
Coincident Indicators
(where the cycle is now)
Lagging Indicators
(where the cycle has been)
Leading Indicators
• Def. Economic activity that happens prior
to (before) a change in the economic
cycle.
• These are predictors of where the
economy is going next: Expansion or
contraction.
Leading Economic Indicators
•
•
Indicator
Average weekly
initial claims for
unemployment
Stock Prices
•
•
Significance
Reflect layoffs and
new hires (more
unemployment,
contraction. Less
unemployment,
expansion)
Reflect Investor
attitudes (rise
=expansion, fall=
contraction)
Leading Economic Indicators
(cont.)
•
•
Indicator
Interest Rates
Index of consumer
confidence (a survey
of how people feel
about the economy)
•
•
Significance
Rates are lowered if
a recession is
coming, raised if
expansion.
Reflects changes in
consumer attitudes
about the future.
Coincident Indicators
•
Def. Information that is used to measure
economic change as it happens.
1.
2.
3.
4.
Total industrial production
Total industrial sales
Personal Income
Number of employees on industrial
payroll
Lagging Indicators
•
Def. Economic activity that change after
the business cycle expands or contracts.
1. Interest rates banks charge on loans
2. Amount of money owed
Unemployment
Last Unit: 16+, not institutionalized,
temporarily laid off, and looking for work.
• Unemployment Rate: def. the percentage
of the labor force unemployed and actively
looking for work.
(remember, we don’t count people not
looking for work, “hidden unemployment”)
Types of Unemployment
•
•
•
•
Frictional Unemployment
Cyclical Unemployment
Seasonal Unemployment
Structural Unemployment
Frictional Unemployment
• Def. People who are between jobs or just
entering the workforce
– Ex. High School/College graduates, people
changing careers, etc.
• This is a normal kind of unemployment.
Cyclical Unemployment
• Def. Unemployment caused by changes in
the business cycle during a contraction
phase. Businesses lay off workers and the
unemployment rate increases. These
workers will find work when the business
cycle moves to an expansion phase. This
is a normal form of unemployment.
Seasonal Unemployment
• Def. Unemployment caused by natural
changes in weather/season.
– Ex. Farming, construction, Darien Lake
workers, snow plowers, landscapers.
• When the season changes, they will get
their jobs back. Another normal form of
unemployment.
Structural Unemployment
• Def. Changes in the economy that makes
certain workers obsolete. Their skills are
no longer needed.
– Ex. Business owners move the factory to
another country (outsourcing), robots replace
assembly line workers.
• This is a bad form of unemployment.
These workers have a difficult time finding
new jobs because their skills are not
needed. Need to be re-trained for the new
job market
Inflation
• Def. A general rise in prices due to a
decrease in the value of money.
– Ex. 5 years ago, a can of soda from a
machine cost $.75. Today it is $1.00 or more.
• Inflation is natural and even necessary.
But when inflation increases too quickly, it
has dangerous effects on the economy.
(i.e. people cannot afford to purchase
needs and wants)
Causes of Inflation
• Demand-Pull Inflation:
– When the demand for products exceeds the
supply, prices rise. Too many dollars, too few
goods. This is a natural result of expansion of
the Business Cycle.
• Cost-Push Inflation:
– When scarcity causes the cost of production
to increase, prices rise. Ex. Gas prices
increase the cost of fuel for airplanes, so
ticket prices increase
Effects of Inflation
1. Price of goods rise (ex. Can of soda)
2. Money buys less
3. Standard of living declines (ex. More and
more households have two people
working to make ends meet)
4. People who save money are hurt (if
inflation is higher than investment
returns, losing money!)
Effects of Inflation cont.
• Inflation hits people with fixed incomes
(people with a set monthly income that will
not increase) the hardest.
– Ex. Retirees and disabled people. Their social
security checks, pensions, or investments are
limited and do not increase even when prices
increase.