Economics refers to the economic activities of all economic units within an economic region and their interactions.
Key aspects to consider when analyzing a national economy include the following:
- Economic output (gross domestic product, national income)
- Distribution of income
- Price development
- Structure
- Level of employment (unemployment)
- Openness (foreign trade)
Economic indicator (gross domestic product – GDP)
- GDP represents the total value of all goods and services produced within a country's borders during a specific period, provided they are exchanged for monetary compensation.
- Gross domestic product is an important measure of a nation’s economic performance.
- GDP data for the last two quarters are typically reported as preliminary estimates and are often subject to significant revisions.
- Actual economic performance is represented by real GDP (= nominal GDP adjusted for price effects). The difference is also referred to as the GDP deflator (a measure of overall price trends in the economy).
Although GDP figures are important and receive the attention they deserve, financial markets rarely react to their release. Their trends are usually anticipated by leading indicators. Significant market reactions can be observed when GDP figures come as a complete surprise.
Economic indicators
- Leading indicators (also known as advance indicators) provide signals about future economic trends
- Current indicators (also known as coincident indicators) reflect current economic developments
- Lagging indicators (also known as trailing indicators) indicate how the economy has performed in the past
- Other indicators
Example of a leading indicator: Composite index of leading economic indicators (LEI)
Published monthly by the Conference Board with a one-month lag.
This index consists of ten financial market and real economy indicators that are aggregated into a composite index with a base value of 1996 (1996 = 100). The LEI is widely recognized as an effective tool for forecasting the business cycle. The monthly change in the composite index is published. The ten equally weighted indicators are:
Components of the LEI
| Real economy indicators | Financial markets/expectations |
|---|---|
| Average weekly work hours in manufacturing | Stock prices |
| Neuanträge auf Arbeitslosenunterstützung | Real money supply growth (M2) |
| Lead times | Changes in the yield curve |
| Building permits | Consumer confidence |
| New orders (real) for consumer goods | |
| New orders (real) in manufacturing |
Example of a current indicator: new initial claims (new applications for unemployment benefits)
This indicator is published monthly by the Department of Labor with a five-day delay.
It reports the number of people filing claims for state unemployment insurance for the first time. Due to the high volatility of the weekly figures, the 4-week moving average is also published. However, since new unemployment benefit claims are a good indicator of the employment situation, they are also used by the Conference Board in its Leading Economic Indicator (see above).
Example of a lagging indicator: Insolvencies
The number of insolvencies cannot be classified as a traditional economic policy target, but it is an important indicator of the state of the economy. It provides important – albeit delayed – insights into economic trends.
If a large number of companies become insolvent over a given period, this has lasting effects on the national economy. In addition to the losses incurred by lenders and suppliers, the employees of insolvent companies must also be taken into account when assessing the resulting economic damage.
Example of other indicators: S&P/Case-Shiller Home Price Index
This index is published monthly by Standard & Poor’s with a two-month lag.
The S&P/Case-Shiller Composite 10 Index tracks price trends for single-family homes in ten cities (Boston, Chicago, Denver, Los Angeles, Miami, New York, San Diego, San Francisco, and Washington, D.C.). The S&P/Case-Shiller Composite 20 Index includes ten additional metropolitan areas.
The Case-Shiller Index receives significant attention in the financial markets because it provides a relatively up-to-date insight of housing market trends. Strong positive or negative readings can therefore trigger significant movements in the bond market, particularly when the bond market is sensitive to developments in the real estate market.
Author
Günther Kornfellner, CFA, CAIA
Derivate Trader, Bybit EU