Macroeconomic indicators are a key part of fundamental analysis for traders as they provide insight into the health of a country's economy.
What are macroeconomic indicators?
Macroeconomic indicators are statistics that reflect the economic conditions of a particular country, region or sector. They are used by analysts and governments to assess the current and future state of the economy and financial markets.
Macroeconomic indicators will vary in their meaning and the impact they have on the economy, but in general there are two main types of indicators:
- Leading indicators that predict where the economy might be heading. They are often used by governments to implement policies because they represent the first phase of a new economic cycle. These include the yield curve, interest rates, and stock prices.
- Lagging indicators, which reflect the historical performance of the economy and change only after the appearance of a certain trend. These include gross domestic product (GDP), inflation and employment rates.
There is also a category of overlapping indicators, but these are usually grouped with lagging indicators because they occur at the same time as or after the economic shift.
Why are macroeconomic indicators important for traders?
Macroeconomic indicators are important for any trader because they can have a significant impact on market movements. This is why any fundamental analysis will include macroeconomic indicators.
It is impossible to be sure that these indicators are themselves reliable, but they do play a role in shaping the economy. Even if these indicators simply influence other traders to open and close positions, it may be enough to create volatility in the market.
Market participants will monitor analysts' forecasts for the data prior to release. The greater the difference between analysts' forecasts and the actual figure, the more volatility can be expected in financial markets as positions are adjusted to reflect the actual figure.
Specific datasets have more impact across countries, so it's important to focus on different macroeconomic indicators depending on what asset you're trading. For example, if you are looking at a UK company or the FTSE 100, you need to look at macroeconomic indicators that affect the UK.
Most macro releases occur on fixed dates, which means that traders and investors can prepare for their release and subsequent market volatility.
Top 11 macroeconomic indicators
The best macroeconomic indicator to watch will largely depend on your personal preferences, what positions you hold, as well as which country your portfolio focuses on. However, there are some common indicators that most traders and investors will keep an eye on.
Leading figures:
- Stock market
- Housing prices
- Bond yield
- Production and production statistics
- Retail
- Interest rates
Lagging indicators:
- GDP growth rate
- Consumer Price Index (CPI) and inflation
- The strength and stability of the currency
- labor market statistics
- commodity prices
Stock market
The stock market is considered a good predictor of economic health because market participants spend their time evaluating the health of companies and the economy and are therefore well positioned to gauge future growth.
A rising stock market indicates confidence in the future of a business, which could lead to economic growth. At the same time, a fall in the stock market may mean that investors are taking their money out of stocks and moving into safe assets.
There are some issues with stock market performance as an economic indicator, mainly due to the fact that prices are often based on speculation rather than the true value of a company. This is why stock prices can be overvalued and undervalued.
The stock market also experienced significant bubbles ahead of market crashes, which can create a false sense of optimism about the state of the economy. This happens when traders and investors ignore other macroeconomic indicators and fall under the influence of bullish market sentiment.
There are so many factors that affect stock prices that it is important to use both technical and fundamental analysis to get an idea of future trends in the stock market.
Housing prices and the real estate market
The housing market is widely considered a leading indicator because information can inform the state of the economy months in advance.
The decline in house prices suggests that the number of houses exceeds the number of people who want to buy them. This may be because the prices are too high, or people simply cannot afford to buy a home. When the housing sector weakens, the entire economy feels it. The decline could have an impact on homeowners' wealth, construction jobs and taxes, and could also force homeowners into foreclosure—the name given to the process of lenders seeking mortgages from borrowers.
The 2008 recession is a prime example of the housing market's impact on the economy as a whole. The subprime mortgage crisis had a profound effect on the real estate market and was an early sign of the global financial crisis.
The number of building permits can be a major indicator of economic health because companies will apply for these permits at least six months in advance of construction. If new projects start, this will indicate that these companies expect an increase in demand for housing. If home construction starts to fall, then construction companies will be more pessimistic about the future of the market.
Bond yield
The bond market is considered a good leading indicator, but it is important to note that this market is based only on investors' and traders' expectations of future economic circumstances. So perhaps instead of being considered a leading indicator of what the economy will do, it is a measure of market expectations.
The best way to use bonds is to look at the yield curve. The yield on a bond is the return a trader can receive in exchange for buying and holding a bond. A yield curve is a line plotted on a chart that shows the yields of bonds with the same credit quality but different maturities—in theory, the chart should slope upwards as yields are higher for bonds with longer maturities.
The performance of short-term bonds (with maturities of up to two years) is directly affected by central bank decisions and interest rate expectations. Although the performance of long-term bonds (with a maturity of more than two years) is affected by both interest rates and factors such as inflation and economic growth, which may take longer to take effect.
When these influences come into play, the shape of the yield curve can change. It is these changes that analysts use to forecast economic prospects.
When the economy grows, a positive recovery can be expected as a result of higher inflation. However, debt bonds become more risky as there is an increased likelihood of higher interest rates. This means that bond investors will start demanding higher yields for longer maturities, causing long-term bond yields to rise faster than short-term bonds, resulting in a steeper yield curve.
When the economic future becomes uncertain, the yield curve flattens out. This is because short-term bond yields rise faster than long-term ones as investors become indifferent to the returns generated across all maturities and accept the same for any bond.
If the yield curve becomes inverted when short-term bonds yield more than long-term bonds, this can be seen as a sign that investors expect economic growth to slow sharply with low inflation, and therefore they expect central banks to cut interest rates.
Production and production statistics
Production statistics can be one of the easiest and fastest ways to get reliable data on the state of the economy. An increase in output tends to have a positive impact on gross domestic product (GDP) figures , which is seen as a sign of rising consumption and positive economic growth.
Changes in the level of production can also affect the level of employment. The number of manufacturing jobs available can tell us a lot about how confident companies are in their own expansion into the economy. If a significant number of jobs are available, companies may have an excess of orders they need to fill.
However, it is also important to consider stock levels and retail sales. High inventory levels may indicate an increase in consumer demand, but it may also indicate that manufactured goods are not leaving warehouses.
Retail
Retail sales is data that tracks purchases of finished products and services by consumers and businesses. This is incredibly important since consumerism accounts for the majority of economic activity.
Overall, the growth in retail sales suggests that the economy is improving. If consumers are confident in their economic circumstances and the future of their situation, they will continue to buy goods and fork out for items that are not essential. This causes production levels to rise in line with demand and raises GDP. It can also have a direct impact on the share prices of companies involved in creating "consumer" needs. These stocks are known as cyclical stocks.
However, when consumers begin to doubt their economic future, they will stop buying unnecessary goods and limit their spending. During these periods, protective stocks — stocks of companies involved in the production of consumer goods such as food and utilities — will outperform the average market return. To combat spending cuts, governments often use tax cuts to give consumers more money and increase spending.
However, retail sales alone do not necessarily give an accurate picture of government spending. For example, this may be the case when people take out loans in order to keep spending. While this would show a continuation of strong retail sales, the level of debt would indicate an impending recession.
Interest rates
There are arguments in favor of interest rates as both leading and lagging macroeconomic indicators. They are lagging behind in the sense that the decision to increase or decrease rates is made by central banks after an economic event or market movement has already taken place. However, they are also in the lead because once the decision is made, there is a significant chance that the economy will change to reflect the new level of interest rates.
For example, during times when there is high consumer spending and high inflation, central banks can be expected to raise interest rates to stop the economy from growing too fast. This decision confirms the growth of the market. However, the new rates mean that banks will have to pay a higher rate to get the money, which in turn will increase the cost of borrowing for consumers. This makes consumers more reluctant to borrow money and discourages spending. The decisions taken by central banks will have a significant impact on banks, consumers and businesses around the world.
On the other hand, if the economy is stagnating, analysts expect central banks to cut interest rates to boost spending. The decision confirms that the economic situation is grim, but it is an indication that the cost of borrowing will soon fall, spending will increase, and the economy will start to grow.
GDP growth
Gross domestic product (GDP) is the monetary value of all goods and services produced in a country. This data is widely used to compare differences between two countries and predict their growth.
When GDP increases, it can have an impact on other indicators on this list, such as employment rates, as companies hire more workers and increase production.
If a country has a stable GDP growth rate, this is a good sign of the stability of the economy. However, rapidly growing GDP figures are often criticized. Some analysts argue that it is too easy to manipulate GDP figures through programs such as quantitative easing or excessive government spending.
For example, until 2019, India was declared the fastest growing major economy with an annual GDP rate of 7%, but finding a flaw in the measurement process between 2011-2017, it turned out that this figure was actually 4.5%.
As a lagging indicator, traders and investors can only tell how much GDP is. However, the theory says that if the level of GDP falls for two quarters in a row, then the economy enters a recession or recession.
Inflation
Inflation is a steady increase in the prices of goods and services in a country. This is a lagging indicator because it is the result of economic growth or recession.
During periods of economic growth, inflation is likely to rise. A high level of inflation can have a serious impact on the price of a country's currency, reducing its purchasing power. This may also have an impact on other macroeconomic indicators, as it could lead to a decrease in employment and GDP growth. High inflation drives up interest rates as governments try to control prices.
During periods of economic recession, there may be a decrease in the rate of inflation or even "deflation", when inflation falls below 0%. This may sound positive, but it is actually confirmation that consumers have cut their spending. This is often accompanied by a shrinking money supply, lower retail sales and rising unemployment.
The strength and stability of the currency
A country's currency is a reflection of the health and stability of its economy because the price of a currency is based on how buyers and sellers perceive its value. This is a lagging indicator as the value of the currency will fluctuate depending on the political and economic conditions in the country.
When there is significant uncertainty, the volatility spreads throughout the national currency and the value can change rapidly – the so-called market volatility.
A strong economy is perceived positively by investors who will pay more for the currency. In turn, a strong currency stimulates the economy by increasing purchasing power. The effect of price increases on the currency depends on whether the country is a net importer or exporter. For example, if a country is a net exporter, although goods may be sold at higher foreign prices, importers may not be willing to pay those higher prices. Whereas, if a country is a net importer, it becomes cheaper to buy foreign goods.
A weak economy discourages investment, leading to a depreciation of the currency. This, in turn, lowers the price of exports, which, while less positive for domestic firms, could make prices more competitive on the global stage. It also makes imports more expensive, as the currency may be worth less, which means higher costs or foreign goods for companies and consumers. However, a weakened currency also has the advantage of boosting tourism and demand for domestic goods.
labor market statistics
Perhaps the most useful lagging indicator is the unemployment rate. If the unemployment rate increases on a monthly basis over a period of time, this tends to indicate that the overall economy is worsening in the healthcare sector. If the employment rate is falling, it means that businesses have finally given up hope of improving the situation and have begun laying off their workers.
Even if the economy is thought to be back on track, the unemployment rate may not go down because employers will always wait until they are sure the economy is growing before proceeding to hire new workers.
Commodity prices
Commodity prices are considered good macroeconomic indicators because their market prices often move ahead of other lagging indicators.
An increase in economy-wide demand for commodities such as timber, iron, and oil can be seen as a sign of economic growth. These supplies are often needed to build infrastructure, and therefore the largest importers of goods are emerging market economies. When the demand for these goods decreases, it is a sign that the economy is contracting and construction projects are being abandoned.
Some commodities, such as gold, will rise in value during economic downturns. Gold is considered a safe-haven asset, which is why investors consider it a valuable asset during times of economic uncertainty. If the price of gold rises, it could be a sign of a slowdown in the economy and investors are looking for more stability. If the price of gold declines, this is a sign that investors are moving their money into higher risk assets.
Macroeconomic indicators: results
- Macroeconomic indicators are statistics or data that reflect the economic conditions of a particular country, region or sector.
- Macroeconomic indicators will differ in their meaning and the impact they have on the economy, but in general, these two types are leading and lagging indicators.
- The most widely used indicators are published by authoritative sources such as governments, supranational bodies and non-governmental organizations (NGOs).
- Macroeconomic indicators are important for any trader because they can have a significant impact on market movements.
- Most macro reports occur on fixed dates, which means that traders and investors can prepare for their release and subsequent market volatility.
- Popular popular macroeconomic indicators to watch include the stock market, house prices, bond yields, production and manufacturing statistics, retail sales, and interest rates.
- Popular lagging indicators include GDP growth, consumer price index (CPI), national currency strength, labor market statistics, and commodity prices.
- The importance of data can vary from country to country, so it is important to know and consider key indicators by region.