An economic indicator is astatistic that is used to measure current conditions and to forecast future trends. Businesses, consumers, economists, and government agencies use these indicators to evaluate the state of the economy, predict future economic trends, make spending and investing decisions, and set fiscal policy.
Economic indicators usually reflect the state of specific areas that impact the economy, such as employment, compensation, inflation, or the stock market. Taken together, they can give a broad picture of the country's economic health and direction.
Key Takeaways
- Economic indicators are used by consumers, businesses, and governments to judge current and future trends in the economy.
- Economic indicators can be used to make spending and investing decisions or set fiscal policy.
- The DJIA, the S&P 500, and the NASDAQ indexes all are indicators of the current state of the stock markets.
- Other economic indicators measure the direction of the wider economy, such as gross domestic product and the consumer confidence index.
- Leading economic indicators predict future trends, and lagging economic indicators confirm existing trends.
Key Indicators for the Stock Market
The key indicators for U.S. stocks are the major American stock indexes. They include the Dow Jones Industrial Average (DJIA), the Standard & Poor's 500 Index (S&P 500), and the Nasdaq Composite Index (NASDAQ).
Each of these indexes was created as a way to capture the status of the stock markets or a sector of the markets from one day (or one moment) to the next. They indicate whether "the markets" as a whole are up or down, a little or a lot. Each index has its own history and followers among financial professionals and the media.
Stock indexes reflect investor confidence and, to some degree, the health of the overall economy. Other indicators are used to track the immediate past performance of the economy, as well as to forecast its future.
Dow Jones Industrial Average
The DJIA also referred to as the Dow,is the oldest stock index, created in 1896. It tracks just 30 companies, all of which are "blue chip" companies, or leaders in their industries. The word "industrial" in the name dates from an era during which the most important American companies were its industrial titans. To this day, it is the most highly used and frequently quoted of all the leading stock market indicators.
S&P 500
The is made up of 500 stocks from across all industry sectors. Some investors consider it to be a more accurate gauge of the markets as a whole because it has broad representation and it's value-weighted. That is, each component's weight in the index is proportionate to its market value.
NASDAQ
The Nasdaq Composite Index tracks more than 3,000 stocks listed on the Nasdaq Stock Exchange. Because of the makeup of that exchange, the index includes many younger companies large and small, particularly in the technology, biotechnology, and pharmaceutical sectors.
Key Economic Indicators
Most other economic indicators are government reports or surveys that only make sense in the context of time. That is, if an indicator is up compared to a month earlier, the economy is strengthening. If the indicator is down compared to its position in previous months, the economy is weakening.
The economic indicators most often used by analysts and investors in the United States include gross domestic product (GDP), the Consumer Price Index (CPI), the nonfarm payroll report, and the Consumer Confidence Index.
Other economic indicators are relevant to investors in certain sectors of the economy, though they can also provide information about broader economic trends. Manufacturing orders and building permits, for example, can indicate whether construction companies are confident enough in economic expansion to plan for a lot of new construction or not.
Gross Domestic Product
No indicator is more closely watched over time than gross domestic product, or GDP. This measures the total value of all goods and services produced in a country. It reflects all of the consumption that has occurred in both the public and private sectors. GDP reports are issued quarterly and annually. The GDP in the United States at the end of 2023 was $27.36 trillion.
Economists look at both the overall value of the GDP, as well as the percent change in GDP over time and GDP as compared to the national deficit, to measure the strength of the economy and predict future economic trends.
Consumer Price Index
CPI tracks the cost of living in the U.S. by tracking the prices of a mixture of consumer goods and services. The CPI measures how the cost of a basket of goods and services changes over time for about 93% of the U.S. population, which reflects changes in inflation and cost of living.
The CPI measures the average cost of:
- Food and beverages
- Housing
- Transportation
- Apparel
- Medical care
- Education
- Recreation
- Communication
- Personal goods and services (such as haircuts, funerals, tobacco products, etc)
Nonfarm Payroll Report
The monthly nonfarm payroll report tracks the health of the job market by measuring the hours and salaries of most (but not all) nonfarm workers. It omits government employees, self-employed workers, and employees of non-profit groups as well as farmworkers. This includes about 80% of workers in the U.S. who contribute to the GDP. It also includes the labor force participation rate, which shows the percentage of the working-age population that is actively employed.
Consumer Confidence Index
The consumer confidence index is another leading indicator. This closely watched survey assesses the degree of optimism or pessimism that consumers feel for the economy and their own financial security. This logic is that the more optimistic consumers are, the more money they will be willing to spend, which will stimulate the economy and create growth.
What Are Lagging vs. Leading Indicators?
Indicators are either lagging indicators or leading indicators. Leading indicators are measurements that change before changes occur in the economy. They suggest which way the economy may be trending next. Lagging indicators change in response to economic changes. They allow analysts to track the direction of the economy, or a substantial component of it, over time.
Are Leading or Lagging Indicators More Important?
Both leading and lagging indicators are important, though they are useful in different ways. Leading indicators indicate likely trends. They can warn governments or businesses to make adjustments that will prevent or soften negative economic outcomes. However, leading indicators can be misleading or inaccurate. Lagging indicators show or confirm trends that have already happened, which can provide more concrete, actionable information for businesses, consumers, and government policy.
Does the Stock Market Reflect the Health of the Whole Economy?
The stock market doesn't reflect the health of the whole economy. Instead, it represents investor confidence in the direction of the economy. In that sense, the stock market is a leading economic indicator. The stock market can impact the overall economy, as businesses and investors may adjust their spending based on the health of the stock market. A rising stock market often indicates confidence in both businesses and investors, which can have an impact on GDP.
The Bottom Line
Economic indicators can either predict future economic trends or confirm existing trends. They are used by consumers and businesses to make decisions about spending and investing, and by governments to set fiscal policy.
Key indicators for the stock market are large indexes such as the Dow Jones Industrial Average, S&P 500, or NASDAQ. Key indicators for the overall economy include gross domestic product, the nonfarm payroll report, the consumer price index, and the consumer confidence index.
