 Ask
Dr. Econ
What is the single most important economic indicator for policymakers:
Gross Domestic Product, job growth, the stock market, the unemployment
rate, the Consumer Price Index, or the index of leading economic indicators?
(11/1999)
In the course of monitoring the economy and setting monetary policy the
Federal Reserve follows a large set of indicators of present and future
output, employment, inflation, and economic conditions. However, most
policy makers do not believe that any single indicator is "reliable enough
to be used mechanically as a sole target or guide to policy."
Movements in several key indicators help the Federal Reserve monitor
how successful it is in attaining its two primary economic goals, which
are to promote "maximum" output and employment and to promote "stable"
prices. Several of the indicators mentioned in your question play an important
role in this process.
The most comprehensive measure of overall economic performance is gross
domestic product or GDP, which measures the "output" or total market value
of goods and services produced in the domestic economy during a particular
time period. GDP is probably the best measure of the overall condition
of the economy because it includes the output of all sectors of the economy.
It is common to use the quarterly real GDP series (nominal GDP adjusted
to remove the effects of inflation) to determine the timing of business
cycle expansions and recessions, although the National Bureau of Economic
Research uses more timely monthly indicators to determine official business
cycle dates.
Total nonfarm payroll employment is used as a measure of overall labor
market conditions. Job growth is classified as a coincident economic indicator,
meaning that job growth rates move closely in line with GDP and the overall
economy. Job growth, combined with information from unemployment rates
and other labor market conditions provide analysts with tools for monitoring
the health of labor markets.
Inflation, defined here as "the rate of increase in the general price
level of goods and services" can be measured in several ways. The
consumer price index (CPI) is often used as a measure of inflation. Two
other frequently watched inflation measures are the producer price index,
which measures prices producers pay for inputs, and the GDP deflator,
the series used to adjust GDP for changes in the overall price level over
time. Analysts watch trends in these series, as well as interest rate
spreads, the yield curve, and measures and surveys of inflation expectations
to measure both the level of inflation and inflation expectations in the
economy.
In addition to the output, employment, and inflation indicators, a number
of other economic indicators have different properties that make them
valuable tools for analyzing the economy. One example is the index of
leading economic indicators, compiled by The Conference Board.
The index is a composite of 10 indicators that tend to move up or down
several months before the overall economy. Emerging trends in this group
of leading indicators tend to provide more reliable signals than movements
of the individual indicators. Therefore, analysts often watch the index
of leading indicators for persistent movements that may be taken as a
signal of future trends in the direction of the economy. Several frequently
watched individual indicators that are components of the index of leading
indicators are the money supply (M2), index of stock prices (500 common
stocks), consumer expectations, housing permits, and manufacturer's new
orders.
Analysts also have a wide variety of other indicators of economic performance
that they may follow. For example, staff at this Federal Reserve Bank
regularly prepare an economic briefing packet that contains over one hundred
charts and data tables that show over fifty economic indicators. The indicators
range from labor market conditions to industrial production, from monetary
policy indicators and interest rates to fiscal policy, from regional and
domestic to international indicators, from oil prices to stock market
indices. Reflecting the complexity of the economy, FOMC policymakers and
staff economists review these charts and tables, as well as the results
of econometric models, when they evaluate the economic health of their
Districts and the nation.
References
U.S. Monetary Policy: An Introduction. 1999. FRBSF
Economic Letter 99-01 (January 1). <http://www.frbsf.org/econrsrch/wklyltr/wklyltr99/el99-01.html>
The Conference Board, Business Cycle Indicator
Homepage. <http://www.tcb-indicators.org/bcioverview/bcioverview.htm>
For information on a variety of economic indicators,
see the Federal Reserve Bank of St. Louis web site. <http://www.stls.frb.org/publications/index.html#data>
The National Bureau of Economic Research (NBER),
US Business Cycle Expansions and Contractions web page. <http://www.nber.org/cycles.html>
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