Economic Indicators Paper

Economic Indicators Paper

What does it mean when someone refers to the health of an economy? Furthermore, how can one classify an economy? Americans love to quantify data. Because of this inherent need to compare data, economists have developed a way to collect nearly every type of statistics that may reveal the general health of the economy. These statistics actually tell if the economy is productive and efficient or if it is slow and inefficient. Included in these statistics are Gross Domestic Product (GDP), Consumer Price Index (CPI), Unemployment Rate, Retail Sales, Producer Price Index (PPI), and Personal Income. Included in this paper, Team A defines the preceding six indicators, and describes their status. Additionally, a historic trend graph will illustrate these six indicators.

Impact of Real GDP

Gross domestic product or GDP is the broadest measure of the health of the US economy. Real GDP is defined as the output of goods and services produced by labor and property located in the United States. The GDP generally lags other indicators' release dates. As such, other indicators "build up" to the market's anticipation of how the GDP numbers describe the state of the economy.

Real GDP is an important indicator to track because it provides the greatest and broadest sectoral detail of any other series. The data associated with GDP reflect income as well as expenditure flows. Sectoral coverage includes durable and nondurable goods, structures, and services. In addition, price data by sector are available for detailed subcomponents. Because of

the detail available in the GDP reports, this series provides comprehensive information on supply and demand conditions, including information for various types of developing imbalances over the business cycle.

Real GDP is a quarterly figure, but released on a monthly basis with an initial estimate referred to as the "advance" estimate with two subsequent revisions over the following two months. The Bureau of Economic Analysis (BEA) produces the GDP figures and releases the advance estimate, generally during the fourth week of the first month following the reference quarter. That is, the first quarter advance estimate is published in late April, and subsequent first estimates are released in July, October, and January. The first revised estimate for a given quarter is known as the "preliminary" estimate, and the third estimate for a given quarter is called the "revised" or "final" estimate. Annual revisions are usually released in July with the first figures for the second quarter. They cover the three prior calendar years and the quarter(s) already published in the current year. Benchmark revisions occur about every five years with the base tied to a recent quinquennial economic census as the Census Survey of Manufacturers.

Unemployment Rate Indicator

The unemployment rate is an important economic indicator. This rate indicates how many people would like a job, but unable to find one. The unemployment rate is calculated by the number of unemployed workers divided by the number of people in the labor force. According to the US Department of Labor, the annual Unemployment rate in 2004 was 5.5 and 6.0 in 2003, which was a decrease of .5 over the prior year. As one can see from the graph below the rate in 2004 was 1.5 higher than in 2000. This means that the US employment rate was significantly lower in 2000 than in 2004, but has shown some improvement since 2003. The decrease in the unemployment rate tells individuals that the economy is starting to upturn and the more businesses are able to increase employment due to demand of their services or products. It is hoped that the unemployment rate will continue to lower in 2005, which will help the US economy become more prosperous.

The Inflation Rate as Measured by the Consumer Price Index

Inflation has been defined as "a process of continuously rising prices or of the continuously falling value of money" (DOL, 2005). The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by consumers for consumer goods and services.

There have been many indicators that have been developed to measure inflation. The CPI measures inflation as experienced by consumers through their everyday expenses. The Producer Price Index (PPI) measures inflation during the early stages of business development, such as production and sales. The best measure of inflation for a given application depends upon how one intends to use this data. CPI allows businesses to adjust prices based upon a comparison of the current cost of a defined set of goods and/or services to the cost of those same goods at a time in the past. It is also, "the best measure to use to translate retail sales and hourly earnings into real or inflation-free dollars" (2005).

The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation's economy to government, business, labor, and private citizens and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies.

Retail Sales

Retail sales, represent an important component in the economy. Products sold by companies, such as Target and local retail stores are tracked and reported to the Census Bureau. The Census Bureau compiles this data on a monthly basis and releases it within two weeks of the previous month. The information released every month shows the fluctuation in consumer sales. For example, a negative number indicates that sales decreased from the previous months sales. This