Economic indicators are macroeconomic data points that facilitate an assessment of the overall health of an economy (or a subset of the economy), as well as any trends or signs of forthcoming changes. These indicators also influence monetary policy and drive investment decisions.
Indicators are either leading, lagging or coincident. Leading indicators point toward future conditions. Lagging indicators confirm a pattern that is already in progress. Coincident indicators underscore the current state of the economy.
Economic indicators are usually released by government agencies and non-profit organizations. Some of the most widely followed indicators in Canada and the U.S. are as follows:
- Gross Domestic Product
- Employment Situation
- Consumer Confidence
- Industrial Production
- Producer Prices
*Note that many of these indicators are available from countries other than Canada & the U.S.
GDP is universally considered the most important of the top economic indicators, since the others tend to rise and fall depending on what’s going on with GDP. Economists trying to determine how the economy is doing overall will typically focus on GDP, employment and inflation.
Gross Domestic Product (GDP)
GDP measures economic output. It represents the total value of everything produced within a country’s borders. The components of GDP are personal consumption expenditure (C), business investment (I), government spending (G), exports (X), and imports (M).
Consumer spending is the most influential component. It accounts for nearly 70% of U.S. GDP, but less of Canada’s (about 55% in 2021), given that country’s sizeable natural resource exports.
GDP is presented on both a nominal and real basis. Real GDP removes the effect of inflation to allow comparisons across different years.
Statistics Canada and the U.S. Bureau of Economic Analysis (BEA) gather and report GDP data, which includes nominal GDP, real GDP, GDP growth rate, real GDP per capita, and debt-to-GDP Ratio. New GDP statistics are released monthly and often revised after the initial report is published.
Central banks use GDP growth rates to set monetary policy. The Federal Reserve and Bank of Canada may take action to lower the growth rate if it exceeds their target rate, but other economic factors must also be considered.
Durable Goods Orders are a subset of GDP, but an economic indicator on their own. They can be capital goods (items used by businesses to produce goods and deliver services, like tools, buildings, vehicles, machinery, and equipment), as well as consumer goods. They’re expensive items that should last for at least three years, since businesses and consumers only buy big-ticket items when they feel confident about the economy.
Statistics Canada and the U.S. Census Bureau report durable goods orders on a monthly basis. Although a component of lagging GDP, durable goods orders are a leading indicator.
Nonfarm Payrolls and the Unemployment Rate
The U.S. Employment Situation Summary contains nonfarm payroll and unemployment numbers, but is better known as the employment or jobs report. The Labour Force Survey and the Survey of Employment, Payrolls and Hours provide similar information for Canada, but are released separately.
Nonfarm payrolls indicate the change in the number of employees, not including farm, government, private households, proprietors, non-profits, and active military. This data provides an update on the status of employment and includes a number of other metrics, not just the unemployment rate and nonfarm payrolls.
These reports give a sense of how healthy the job market is and are amongst the most-anticipated and comprehensive economic news releases. This data can help identify trends in economic growth, inflation, housing starts, and GDP, all of which affect financial markets.
U.S. data is published the first Friday of each month by the U.S. Bureau of Labor Statistics. Statistics Canada publishes both Canadian reports with the Labour Force Survey out the first or second Friday of each month, and the Employment Survey is released subsequently.
The metrics contained in these reports are considered lagging indicators.
Inflation aka Consumer Price Index (CPI)
CPI became one of the most watched indicators after inflation reached multi-decade highs in 2021. The terms CPI and inflation are interchangeable as inflation/deflation is the increase/decrease in CPI.
CPI measures inflation by tracking price changes for a basket of household goods and services purchased by consumers. Core inflation excludes the volatile food and energy components.
Inflation is an important indicator of an economy’s health. Governments and central banks use CPI data to inform economic policy decisions, based on how closely readings are in line with official inflation targets.
The Bureau of Labor Statistics and Statistics Canada calculate and report CPI on a monthly basis.
The U.S. also tracks personal consumption expenditures (PCE), which sources data from businesses (and not consumers, like CPI) and is reported by the Department of Commerce. The Fed is now more focused on PCE since it covers a wide range of household spending, but still closely tracks CPI.
CPI is a lagging indicator.
The U.S. Consumer Confidence Index (CCI) measures attitudes about current and future economic conditions by surveying 3,000 households about business, jobs, buying intentions, vacation plans, and consumer expectations for inflation, stocks, and interest rates.
The reading is relative to the 1985 baseline reading of 100 and indicates Americans’ assessment of the economy and their ability to find a job. Overall CCI blends the Present Situation index (40%) and the Expectations index (60%).
The Conference Board of Canada calculates the Index of Consumer Confidence using responses to questions about household finances, business conditions, unemployment, inflation, income, economic policy and whether or not it’s a good time to buy or sell a house, vehicle and/or major household items. In Canada, consumer confidence readings range from 0 to 100.
Investors closely monitor consumer confidence data to gauge whether consumer spending will increase or decrease since a rise can spur business spending that in turn boosts earnings and share prices.
Non-partisan think tank The Conference Board reports U.S consumer confidence on the last Tuesday of every month. Canada’s Conference Board also publishes Canadian consumer confidence data on a monthly basis.
Consumer confidence is a leading indicator.
Industrial production is one of the oldest economic indicators. The U.S. industrial production index (IPI) measures output in the manufacturing, mining, electric, and gas industries, relative to a 2012 base year. Canadian industrial production data is essentially identical, but relative to a 2015 base year.
Industrial production reports also entail industrial capacity and capacity utilization metrics. Capacity utilization is the ratio of actual industrial output to potential full capacity output. The higher the utilization rate, the less slack there is for facilities to do additional work.
Industrial production is measured by an index based on a reference period that expresses change in the volume of production output.
Industrial production can help gauge consumer spending, inflation, and economic growth, as well as the directionality of each. High utilization rates suggest rising inflation and higher interest rates could be on the horizon.
The U.S. Federal Reserve and Statistics Canada source industrial production data and both publish on a monthly basis; however, capacity utilization data is prepared on a quarterly basis in Canada.
Industrial production and capacity utilization metrics are leading indicators.
Producer Price Index (PPI)
Another of the oldest indicators, producer price indices measure the change in selling prices received by domestic producers for their output, whether sold to other producers or to retailers. Unlike CPI, these price changes are from the perspective of the seller. U.S. PPI metrics cover more than 10,000 different goods and services.
PPIs employ different weighted calculation methodologies and the coverage can also differ. U.S. PPI only covers manufacturing and services while Canadian PPI covers the complete economy, including both the public and private sectors.
Producer price indices facilitate calculations of the real value of economic output after factoring in price changes, which can be used to adjust contracts to keep pace with inflation.
An increase in the PPI usually means that inflation is poised to rise as producers will need or want to pass along cost increases to consumers.
The Bureau of Labor Statistics calculates U.S. PPIs and releases this data during the second full week of each month while Statistics Canada also publishes Canadian data on a monthly basis.
PPI readings are considered an important leading economic indicator.
A word of caution on economic indicators
These are amongst the more important and widely followed economic indicators, but there are numerous others that garner attention and wield influence on investment decisions, as well as fiscal and monetary policy.
While we caution against interpretations of economic data being used to make predictions and/or investment decisions (even the so-called experts often get their forecasts wrong.
This economic data site is a great free resource for anyone who wants to take a look at some U.S. indicators and learn more about this topic.