UNDERSTANDING
INDICATORS
Mrs. Eskra
OBJECTIVES:
What will you learn?
• Explain how economists use data to study
the economy.
• Define and give examples of different
economic indicators:
– Leading indicators
– Lagging indicators
– Coincident indexes
BUSINESS CYCLES
• It is normal for the
economy to go through
periods of growth and
contraction.
Peak
Trough
• Most people are
concerned about things
such as the unemployment
rate and inflation.
BUSINESS CYCLES
Peak
Trough
Economists use many
different kinds of data to
help them:
Predict where the
economy is headed
Explain what has just
occurred in the
economy
Look at what is
currently happening in
the economy
Economists and Data
• Economists study economic indicators
– These give an overall view of the economy at any
given point in time.
This is why they are studied in
macroeconomics!
– Three different categories of indicators:
• Leading
• Lagging
• Coincident
LEADING INDICATORS
Trends, patterns or situations that
assist in forecasting the economy.
LEADING INDICATORS
Examples of leading indicators:
• Unemployment insurance claims
• Building permits
• Stock (equity) market performance
• Retail sales
Retail Sales Report
• The Census Bureau and the Department of Commerce
publishes this report monthly.
• It is very detailed, including sales for specific industries:
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Motor vehicle and parts dealers
Investors can
Furniture and home furnishing stores
see what is
Electronics and appliances stores
going on in
each
Food and beverage stores
industry!
Health and personal care stores
Gasoline stations
Clothing and accessory stores
Sporting goods, hobby, book and music stores
General merchandise stores
Food services and drinking places
The Retail Sales Report
• From January 2014 report:
(http://www.census.gov/retail/marts/www/marts_
current.pdf)
The U.S. Census Bureau announced today that advance
estimates of U.S. retail and food services sales for
December, adjusted for seasonal variation and holiday
and trading-day differences, but not for price changes,
were $431.9 billion, an increase of 0.2 percent (±0.5%)*
from the previous month, and 4.1 percent (±0.7%) above
December 2012. Total sales for the 12 months of 2013
were up 4.2 percent (±1.7%)from 2012. Total sales for the
October through December 2013 period were up 1.0
percent (±0.5%) from the same period a year ago.
Retail Sales:
A Leading Indicator
• Why are retail sales a leading indicator?
– Increases in retail sales will often lead to an
increase in the CPI.
Businesses are seeing an increase in demand
for their goods/services and can raise prices.
– Decreases in retail sales raise concerns about a
recession coming.
As firms see a decrease in sales, they may begin
laying off workers and producing less.
LAGGING INDICATORS
Trends, patterns, or situations that
provide a clear indication of where
the economy has been.
LAGGING INDICATORS
Examples of lagging indicators:
• Unemployment rate
• Consumer price index
• Consumer credit
Measuring Inflation
• The Bureau of Labor Statistics measures the
rate of inflation in the economy.
• Inflation – an increase in the overall price level
– Happens when many prices increase
simultaneously.
• Inflation is measured from two perspectives:
Consumers (CPI)
Producers (PPI)
CPI
Consumer Price Index.
Reflects changing price for a fixed
bucket of goods and services.
Consumer Price Index
• Economists use price indexes –
measurements that show how the average
price of a standard group of goods changes
over time.
The most common is the
Consumer Price Index (CPI)
The CPI Market Basket
CPI uses a bundle of goods meant to represent the “market
basket” purchased monthly by the typical urban consumer.
Category
Examples
Food and drinks
Cereals, coffee, chicken, milk, restaurant meals
Housing
Rent, homeowners’ costs, fuel oil
Apparel and upkeep
Men’s shirts, women’s dresses, jewelry
Transportation
Airfares, new and used cars, gasoline, auto
insurance
Prescription medicines, eye care, physicians’
services
Newspapers, toys, musical instruments
Medical care
Entertainment
Education and communication
Other goods and services
Tuition, postage, telephone services,
computers
Haircuts, cosmetics, bank fees
CPI Market Basket
Food and beverages,
15.6
Housing
Apparel
Other g&s, 4.3
Housing, 40.9
Education and
Communication, 5.8
Transportation
Medical Care
Recreation
Recreation, 5.9
Education and
Communication
Other g&s
Medical Care, 6
Transportation, 17.3
Apparel, 4.2
Food and beverages
The CPI Market Basket
• The goods and quantity consumed in this
“basket”
Held constant from one period to another
• The prices
Allowed to vary (use prices that are currently
seen in the market = nominal prices)
The idea is that the CPI then captures price
changes for a standard group of goods.
The CPI
• From the January 2014 Report
(http://www.bls.gov/cpi/):
The Consumer Price Index for All Urban
Consumers (CPI-U) increased 0.3 percent in
December on a seasonally adjusted basis, the U.S.
Bureau of Labor Statistics reported today. Over
the last 12 months, the all items index increased
1.5 percent before seasonal adjustment.
The CPI
The CPI may overstate changes in the cost of
living because it does not account for the fact
that people substitute away from more
expensive items over time and buy cheaper
goods.
Ex: Groceries have recently become a lot more
expensive, so more people are choosing to purchase
more food items at WalMart or more generic brands.
PPI
Producer Price Index.
Reflects price movement for
raw materials, intermediate
and final good production.
Measuring the PPI
The idea behind measuring the PPI
To see if there is one stage of the
production process that is the cause for
price changes in the market.
Measuring the PPI
• Therefore, the PPI measures wholesale price
changes in three different categories:
Category
Crude goods
Intermediate goods
Finished goods
Description
The initial inputs in the
production process of a good.
Components used to make the
end product.
Goods that are produced and
ready to be distributed/sold.
The PPI
• From the January 2014 Report
(http://www.bls.gov/ppi/):
The Producer Price Index for finished goods
advanced 0.4 percent in December…At the earlier
stages of processing, prices received by producers
of intermediate goods rose 0.6 percent in
December, and the crude goods index climbed 2.4
percent.
CPI & PPI:
How are they used?
• Both used to measure price changes
(inflation), just from different perspectives:
CPI – consumers
PPI – producers
• To calculate inflation rate, use CPI or PPI in
two periods:
– (CPI2-CPI1)/CPI1
– If CPI in Year 1 = 100 and CPI in Year 2 = 103
(103-100)/100 = .03 = 3% inflation
The CPI & PPI as Indicators
• The PPI generally predicts what is going to
happen to the CPI.
Used extensively by investors
• The CPI is considered a lagging indicator:
– It takes some time for prices to adjust to economic
conditions.
– As businesses see a drop-off in demand for their
products, they will eventually lower prices.
– As businesses see an increase in demand, they will
raise prices.
The CPI & PPI as Indicators
• Macroeconomists are concerned with
inflation and deflation, so they closely
monitor both of these indicators.
– Rapid inflation decreases purchasing power and
can mean the economy is growing too quickly.
– Deflation can also be problematic as people
hold off purchases, which is not good for the
macroeconomy, and can be a sign that we are in
a recession.
Costs of inflation
• Inflation causes the goods and services we
buy to be more expensive
• But usually people’s income also rises
during inflation (Does it adjust as quickly?)
COLAs = cost of living adjustments
Who is hurt by inflation?
• Fixed income earners – the elderly
– Retired workers live on private pensions
– Monthly checks will never increase
– Some ARE indexed to inflation (like Social
Security)
Debtors and Creditors
• When inflation is anticipated, creditors
charge an interest rate that covers the
decrease in value due to inflation
• Real interest rate = the difference between
interest rate on a loan and the inflation rate
– Ex: interest rate is 10% and inflation is 8%.
The real interest rate is 2% then.
Debtors and Creditors
• When inflation is unanticipated, creditors
are hurt b/c they are paid back in money
that is not worth as much as when they lent
it.
• Inflation that is higher than expected
benefits debtors
• Inflation that is lower than expected
benefits creditors
COINCIDENT INDEX
Indicators that provide a view of the
current state of economy.
COINCIDENT INDICATORS
Example of coincident indicators:
• Consumer Confidence
Consumer Confidence:
Macroeconomics
• If consumers are even slightly fearful of the
future economy, they tend to save any extra
money:
– Choose not book a summer vacation
– Eat in more often than dining out
• This drop-off in spending impacts firms.
– Firms scale back on production and lay off
employees.
People without jobs do not have money to continue
spending and the economy tends to get worse.
Confidence and Macroeconomics
• Simply put:
When confidence is rising, consumers spend
money, indicating a healthy economy.
When confidence is decreasing, consumers are
saving more than they are spending, indicating the
economy is in trouble.
The key idea: When we feel good about the stability
of our incomes, we are more likely to make
purchases.
The Consumer Confidence Index
• From January 2014 report:
(http://www.conferenceboard.org/data/consumerconfidence.cfm)
The Conference Board Consumer Confidence
Index®, which had rebounded in December,
increased again in January. The Index now stands
at 80.7 (1985=100), up from 77.5 in December.
Index was set to 100 the first year it was
calculated in 1985.
Consumer Confidence:
A Coincident Indicator
• Why is consumer confidence a coincident
indicator?
Consumers are responding to questions
about their current attitudes about the
economy and about recent or upcoming
purchases.
Consumer Confidence:
Problems
• This is a popular indicator reported in the
media.
It is something that viewers can relate to.
• How valuable is it as a predictor?
– Consumers are influenced very much by the
media and marketing.
– In reality, it is a volatile and sometimes
inconsistent indicator because of this.
Consumer Confidence:
Example of Media Influence
• During a recent government debt ceiling
crisis, which was highly covered in the
media, the Conference Board reported a
huge decline in consumer confidence.
In that same month, retail sales rose 0.4%!
So it turned out in this case that what
consumers did was quite different from
how consumers responded they felt
about the economy.
Why So Many Indicators???
• There are many different indicators which
help us to assess the state of the economy. It
is helpful to have multiple indicators
because:
Our economy is very complex
No one indicator is perfect at completely
explaining what is going on.
RECAP:
What did you learn?
• Economists use data to study the overall
economy.
• There are three different categories of
economic indicators:
– Leading indicators
– Lagging indicators
– Coincident indicators