Basic Economic Indicators
By Chris Henry
GDP - Gross Domestic Product is the measure of the value of all goods and services produced in a country over time. GDP is usually measured in both quarters and years. Increases in GDP are considered good for the economy, but to compare values across time frames, real GDP is used. To determine “real” GDP, its nominal value must be adjusted to take into account price changes to allow us to see whether the value of output has gone up because more is being produced or simply because prices have increased.
The key difference between the economy and market.
The economy and the market are to distinct entities and may not have a positive correlation in short term.
Economic indicators are normally lagging while the stock market is a forward looking indicator. Speaking long term they should be positive correlated.
How does it affect the economy and market?
To put it simple, you want GDP to grow. A growing GDP is positive for both the economy and the market. Two consecutive quarters of negative GDP growth is a commonly used rule of thumb to indicate a recession
The unemployment rate is a monthly statistic. It is the proportion of the labor force that is not employed but could be.
How does it affect the economy and market?
Unemployment primarily affects two sectors, Consumer Spender and Interest Rates. Take into account expectation and overall state. For example we just got hit with lower 4.1% unemplyment numbers and nonfarm payrolls surged by 256,000 for the month compared to the 155,000 forecast. But the market still fell.
Inflation is the increase of the cost of goods or services over a period of time. Measured as a rate / percentage.
The federal reserve seeks to achieve an inflation rate of 2%. This is done to avoid deflation which can lead to decreased consumer spending as people delay purchases in anticipation of lower prices in the future. It can also help stimulate wage and help erode the value of debt.
How does it affect the economy and market?
Inflation generally has a negative impact on both, as rising prices for goods and services can lead to decreased company profits, reduced consumer spending, and increased interest rates, which can cause investors to become more cautious. When inflation is high, the Federal Reserve (the Fed) typically increases interest rates making it more expoensive for companies to borrow money.
