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Understanding Economic Indicators

The current state of the economy is a constant topic of discussion.  In good times, people discuss what’s going well, or what may present future financial problems.  When times are bad, most of the discussions are focused around when things are going to turn around and get better. 

For the last couple of years, there has been a lot of talk about how bad things are, and more importantly, what the future holds.  If you’re at all interested in business, economic or financial matters, you’ll constantly hear people throwing around statistics, and then discussing what they mean.

If you’re a little confused by the jargon, you’re not alone.  Unless you’re an economist or Wall Street analyst, the terminology may seem abstract, and understanding the significance is more ambiguous. Truthfully, even proficient economists don’t fully know the impact of the numbers.  When most economists speak, they will explain the significance of a statistic, but on the other hand it could mean something else.  These explanations led President Truman to declare that he wanted to talk to a one-armed economist.

Some stats, like the unemployment rate are fairly easy to understand.  If the unemployment rate is 10%, it means that 1 out of every 10 people are unemployed.  But… on the other hand (just kidding), what about all of the seasonally-adjusted verbiage, or how do you segregate the unemployed, from the underemployed from the self-employed?

Economic indicators are statistics that are intended to measure the performance and strength of the economy.  Leading indicators are supposed to be able to provide insight of what’s going to happen in the future, and lagging indicators measure what’s already happened. 

As you can imagine, most of the emphasis is on the leading indicators.  People want to know what the future holds.  If two years ago you knew that the housing market was going to crater and the stock market was going to lose 40% of its value, would you have acted differently? 

Sure there were some people who hedged against the housing market and moved their money into cash, but they didn’t know what was going to happen.  They made an educated guess, or they were very lucky.  Either works, by the way. To the extent they made an educated guess, they probably looked at economic factors and made a prediction based on the information.  That’s essentially the purpose of leading economic indicators.  They’re supposed to give you some insights of what the future holds.

However, they are not a crystal ball or prophetic word.  Like all of life, there is no guarantee what tomorrow brings, and the future is uncertain for all of us.

I’m not an economist.  Therefore, I’m not an economic expert.  It also means I don’t speak like most economists.  I’ll do my best to provide a simple explanation and understanding of some of the economic lingo you hear.  If you have a different way of explaining something, please share.

Next… What are Leading Economic Indicators?

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