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UNDERSTANDING INDICATORS

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.

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UNDERSTANDING INDICATORS

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  1. UNDERSTANDING INDICATORS Mrs.Eskra

  2. 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

  3. BUSINESS CYCLES • It is normal for the economy to go through periods of growth and contraction. • Most people are concerned about things such as the unemployment rate and inflation. Peak Expansion Contraction (Recession) Trough

  4. BUSINESS CYCLES • 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 Peak Expansion Contraction (Recession) Trough

  5. 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

  6. LEADING INDICATORS Trends, patterns or situations that assist in forecasting the economy.

  7. LEADING INDICATORS Examples of leading indicators: • Unemployment insurance claims • Building permits • Stock (equity) market performance • Retail sales

  8. Retail Sales Report • The Census Bureau and the Department of Commerce publishes this report monthly. • It is very detailed, including sales for specific industries: • Motor vehicle and parts dealers • Furniture and home furnishing stores • Electronics and appliances stores • Food and beverage stores • 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 Investors can see what is going on in each industry!

  9. 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.

  10. 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.

  11. LAGGING INDICATORS Trends, patterns, or situations that provide a clear indication of where the economy has been.

  12. LAGGING INDICATORS Examples of lagging indicators: • Unemployment rate • Consumer price index • Consumer credit

  13. 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)

  14. CPI Consumer Price Index. Reflects changing price for a fixed bucket of goods and services.

  15. 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)

  16. The CPI Market Basket CPI uses a bundle of goods meant to represent the “market basket” purchased monthly by the typical urban consumer.

  17. CPI Market Basket

  18. 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.

  19. 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.

  20. 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.

  21. PPI Producer Price Index. Reflects price movement for raw materials, intermediate and final good production.

  22. 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.

  23. Measuring the PPI • Therefore, the PPI measures wholesale price changes in three different categories:

  24. 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.

  25. 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

  26. 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.

  27. 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.

  28. 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

  29. 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)

  30. 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.

  31. 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

  32. COINCIDENT INDEX Indicators that provide a view of the current state of economy.

  33. COINCIDENT INDICATORS Example of coincident indicators: • Consumer Confidence

  34. 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.

  35. 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.

  36. The Consumer Confidence Index • From January 2014 report: (http://www.conference-board.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.

  37. 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.

  38. 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.

  39. 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 didwas quite different from how consumers responded they felt about the economy.

  40. 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.

  41. 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

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