Why economic indicators are critical for investment decision?
Economic indicators provide a snapshot of key parts of a country’s economy. You can read stories almost every day about how well a country is doing based on some economic indicator. Popular indicators track employment, money supply, interest rates, housing starts, housing sales, production levels, purchasing statistics, consumer confidence, and many factors that impact the health of a country’s economy.
While all these indicators are important, we’re going to focus on just a few of the most critical ones. You could go crazy trying to keep your eye on all the indicators and what they mean. We’ve picked four key types of economic reports for you to watch – Gross Domestic Product (GDP), employment statistics, the Fed’s Beige Book, and trade balance statistics.
The GDP is the total value of all final goods and services produced within a country’s borders each year. This indicator measures the national income and output for a country. Each quarter the government releases the percentage of growth in the GDP. Developing countries can grow at a faster pace, but that too can lead to trouble. Growing too fast and too much money can drive a country toward a severe economic downturn. When a country doesn’t act quickly to stem its overheated growth, it can result in a crisis.
Employment reports can be an important indicator of a country’s economic health. When the economy is strong, jobs are created, but as the economy contracts, jobs are lost. If the economy is going too strongly and too many jobs are created, then wages begin to rise as companies compete for the best workers. Rising wages can lead to inflation, which cool the economy. People will then buy fewer goods as interest rates rise, which means less production is needed. When less production is needed, jobs get cut, leading to a weaker economy.
Beige book is one of the easiest ways to get a good overview of what is happening throughout the US economy, which is officially known as the Summary of Commentary on Current Economic Conditions. Information for the book is collected by bank staff through interviews with key business leaders, economists, market experts, and other sources from within each of the bank’s 12 districts. If the Beige Book shows warning signs of inflation, recession, or high unemployment, you are more likely to see the Fed act and change interest rates.
The most critical data you need to find out about the current and potential future status of a country’s currency is its trade balance. Nations that regularly run a trade deficit can expect to see the value of their currency fall. The reason for this is that as a nation’s currency flows overseas, it gets converted.