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Contents
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Introduction to Economic Indicators .............................1 Fundamentals for Interpreting Economic Indicators ......................................................9 Indicators of Economic Activity ...................................23 Indicators of Income ....................................................41 Indicators of Price Levels ..............................................53 Indicators of Interest Rates ...........................................69 Indicators of Resource Utilization ................................81 Indicators of International Exchange ............................95 Indicators of Fiscal and Monetary Policy ....................109 Sources of Economic Indicator Data ..........................123
CHAPTER 1
unemployed supported Governor Carter in representing deterioration in the prospect for jobs. However, when Gerald Ford became president in 1974, the United States was in the midst of a significant recession that began in November 1973. The unemployment rate actually climbed from 5.5% in August 1974 to 9% in March 1975 and then began a decline to 7.6% by the time of the debate (the period of decline corresponding to the 17-month period conveniently cited by President Ford). Thus, a case could be made that the current administration had actually improved the outlook for jobs once it broke loose of the recession it had inherited. Third, as illustrated by Jimmy Carters inclusion of the early months of the Ford Administration (when the country was in recession) in his job loss figures and Gerald Fords exclusion of those months in his account of job growth, it is possible to reframe a set of economic indicator data to appear good or bad by a careful selection of the time interval referenced. When studied properly, statistics can clarify, and be powerful tools of persuasion when carefully extracted and framed to support a point of view. The best defense to confusing economic reports or attempts to use statistics to promote a bias is an improved understanding of economic indicators.
Batesons definition of a piece of information as a difference is also a helpful reminder that these economic indicator announcements occur against a background of expectations based on earlier values of the indicator or anticipated values based on other information. As a result, the response to announcements of recent measurements can be the opposite of what might be expected if these measurements were interpreted in a vacuum. In fact, in the cases of widely tracked indicators, there are published consensus forecasts of what these values will be prior to their actual announcement. For example, suppose the U.S. Department of Labor announces that 402,000 new claims for unemployment benefits were filed in the prior week. Without any context, this may be seen as a negative development because some people who were recently employed are now unemployed. However, if this number of new jobless claims is a lower value than the announcement for recent weeks, this most recent announcement may be a positive sign. At the same time, perhaps the consensus of economists and other professionals who track labor conditions was that the number of new filings would be only 380,000, which might make the actual announcement a negative surprise after all. Stock and bond markets will often react to economic indicator announcements, although expectations again play a key role. The automobile industry may report that motor vehicle sales increased in one month relative to the previous month by 10,000 vehicles, but the consensus expectation prior to the formal announcement was that motor vehicle sales should increase by 30,000 vehicles. Due to disappointment relative to the consensus expectation, the prices of auto-related stocks may actually decrease following the announcement.
influence the ability of individuals and companies to borrow money, as well as influence the interest rates to be paid on debt or earned on savings. Officials in charge of economic policy need an accurate understanding of the state of the economy in order to make effective policy decisions and have created a rich set of economic indicators for that purpose. They also study the impact of past policy measures on economic indicators in order to decide current policy measures. Often the goals of economic policy are stated in terms of those indicators. We will discuss the role of government in the context of economic indicators throughout this book, especially in chapter 9. Investors, business managers, and other parties in the private sector are aware that government officials monitor economic indicators and formulate policy measures intended to change or stabilize future values of those indicators. These parties try to anticipate how economic policy will be altered in response to new indicator announcements and how the economy will be affected by government policy. They may decide it is in their best interests to take preparatory actions ahead of the expected economic changes, rather than wait until the changes occur. Collectively, these preparatory actions can in themselves alter the future direction of the economy. Some economists argue that the combination of these expectations and anticipatory actions by the private sector can diminish, and even distort, the intended impact of policy actions. During the Great Depression in the 1930s, when unemployment was high and economy activity seemed chronically stagnant, the federal government broke with tradition and operated at a large deficit to spend more and pay people to work on public projects. Because this policy change was not generally anticipated, its impact was considerable in jumpstarting the economy. In the 1970s, the U.S. economy was once again facing a slowdown in the overall economy, but by then it was widely expected that the federal government would try to stimulate the economy. The anticipated policy actions helped to fuel a vicious cycle of inflation in wages and prices that unfortunately subverted the goal of stimulating the economy. Not surprisingly, during the 1970s there were formalizations of the notion that expectations of forthcoming policy changes in response to indicators will distort the impact of those policy changes.3
While not every reported indicator is cataloged in this text, the most important and widely cited measures are included. Although economic indicators are also collected and reported for individual states, regions, and even metropolitan areas, this text will focus on measures for the overall United States for the purpose of citing actual values and illustrating the behavior of those measures in recent years. Although the United States is the focus here, similar measures are compiled and reported for other nations, groups of nations, and even worldwide by organizations in other countries or international organizations like the International Monetary Fund and the World Bank. In some cases, the names of the indicator measures may be different and the exact measurement techniques may differ significantly, but an understanding of the measures used for the United States should accelerate the understanding of economic indicators reported for other countries. The collection of data used in the calculation of economic indicators involves complex technical issues related to statistical sampling and
aggregation of data into classes. This book will not deal with all the details involved in gathering and classifying data. While these details are important for developing valid measures, most of us do not need to understand these details to appreciate the meaning of the reported values. However, a basic comprehension of how these indicators are calculated from the collected data is critical to the proper interpretation of economic indicators. Chapter 2 presents these basics, as well as provides a general understanding of how economic indicators are reported. The Internet has become the favored medium for monitoring economic indicators and downloading economic indicator data. Access is free for indicators provided by government sources, and non-government sources provide prompt and free announcements of recent indicator values, if not access to historical data. The challenge is to access these data efficiently and effectively. The final chapter identifies some good online sources and strategies for selecting those indicators that mean the most to you.