Economic Indicators Okay, I should pay attention to the business cycle, but how do I know which direction it is going in?

Economics Joke: There are only two economists in the world know where the economy is going. And they disagree! If you were an economist, this would be hilarious! For the rest of us, not so funny. But, it tells us one thing: economics is unpredictable. We can only guess at what is happening.

Economic Indicators Predicting the business cycle is tricky. Often the economy does not do what economists expect. Looking at lots of indicators give them a feel for what is going on and an idea of how to prepare for the future. Def. Trends in the economy which tell economists where the business cycle is going and where it has been.

Three Types of Indicators Leading Indicators (where the cycle is going) Coincident Indicators (where the cycle is now) Lagging Indicators (where the cycle has been)

Leading Indicators Def. Economic activity that happens prior to (before) a change in the economic cycle. These are predictors of where the economy is going next: Expansion or contraction.

Leading Economic Indicators Indicator Average weekly initial claims for unemployment Stock Prices Significance Reflect layoffs and new hires (more unemployment, contraction. Less unemployment, expansion) Reflect Investor attitudes (rise =expansion, fall= contraction)

Leading Economic Indicators (cont.) Indicator Interest Rates Index of consumer confidence (a survey of how people feel about the economy) Significance Rates are lowered if a recession is coming, raised if expansion. Reflects changes in consumer attitudes about the future.

Coincident Indicators Def. Information that is used to measure economic change as it happens. 1.Total industrial production 2.Total industrial sales 3.Personal Income 4.Number of employees on industrial payroll

Lagging Indicators Def. Economic activity that change after the business cycle expands or contracts. 1.Interest rates banks charge on loans 2.Amount of money owed

Unemployment Last Unit: 16+, not institutionalized, temporarily laid off, and looking for work. Unemployment Rate: def. the percentage of the labor force unemployed and actively looking for work. (remember, we don’t count people not looking for work, “hidden unemployment”)

Types of Unemployment Frictional Unemployment Cyclical Unemployment Seasonal Unemployment Structural Unemployment

Frictional Unemployment Def. People who are between jobs or just entering the workforce –Ex. High School/College graduates, people changing careers, etc. This is a normal kind of unemployment.

Cyclical Unemployment Def. Unemployment caused by changes in the business cycle during a contraction phase. Businesses lay off workers and the unemployment rate increases. These workers will find work when the business cycle moves to an expansion phase. This is a normal form of unemployment.

Seasonal Unemployment Def. Unemployment caused by natural changes in weather/season. –Ex. Farming, construction, Darien Lake workers, snow plowers, landscapers. When the season changes, they will get their jobs back. Another normal form of unemployment.

Structural Unemployment Def. Changes in the economy that makes certain workers obsolete. Their skills are no longer needed. –Ex. Business owners move the factory to another country (outsourcing), robots replace assembly line workers. This is a bad form of unemployment. These workers have a difficult time finding new jobs because their skills are not needed. Need to be re-trained for the new job market

Inflation Def. A general rise in prices due to a decrease in the value of money. –Ex. 5 years ago, a can of soda from a machine cost $.75. Today it is $1.00 or more. Inflation is natural and even necessary. But when inflation increases too quickly, it has dangerous effects on the economy. (i.e. people cannot afford to purchase needs and wants)

Causes of Inflation Demand-Pull Inflation: –When the demand for products exceeds the supply, prices rise. Too many dollars, too few goods. This is a natural result of expansion of the Business Cycle. Cost-Push Inflation: –When scarcity causes the cost of production to increase, prices rise. Ex. Gas prices increase the cost of fuel for airplanes, so ticket prices increase

Effects of Inflation 1.Price of goods rise (ex. Can of soda) 2.Money buys less 3.Standard of living declines (ex. More and more households have two people working to make ends meet) 4.People who save money are hurt (if inflation is higher than investment returns, losing money!)

Effects of Inflation cont. Inflation hits people with fixed incomes (people with a set monthly income that will not increase) the hardest. –Ex. Retirees and disabled people. Their social security checks, pensions, or investments are limited and do not increase even when prices increase.