Macroeconomic Indicators: The Pulse of the Economy

Can you grade the health of an economy? Absolutely! To do this, economists use a set of standardized and proven measures that gauge its most important elements, allowing to determine whether countries are developing or in recession. Macroeconomic indicators are the essential tools used by statistical offices to assess specific elements of the economy, entire industries, or their individual components.

However, macroeconomic indicators are important not only for the Bureau of Economic Analysis (BEA) but also for us individuals, as they can influence our investment decisions. In this article, we’ll explore the most important indicators that you should keep an eye on as an investor.

What Are Macroeconomic Indicators?

Economic literature defines macroeconomic indicators quite succinctly, suggesting that they are measures used to describe the state of the economy from a “macro” perspective, meaning they concern the entire ecosystem.

As such, the main focus of macroeconomic indicators will be how national income is built, along with issues related to unemployment, inflation, balance of payments, investment expenditures, and policies conducted by the central bank.

The list of macroeconomic indicators can be quite long, but in this article, we’ll look at the most important ones from the perspective of the state and the investor. Generally, they take a “lagging” form, meaning they show information that has already occurred in the economy. Among these, we’ll highlight:

Unemployment rate
Corporate profits
GDP growth

However, we also encounter “leading” indicators that try to determine how the economy might behave in the future. The most popular of these include:

Consumer confidence indices
Purchasing Managers’ Index (PMI) surveys
Building permits in the real estate market

The main differences between them are presented in the following table:

	Leading Indicators	Lagging Indicators
Purpose	Predicting future economic changes	Confirming past economic trends
Signal timing	Send signals before changes in the economy	Change after changes occur in the economy
Application	Forecasting and planning	Historical analysis and trend confirmation
Reliability	Less reliable, but more useful for forecasts	More reliable, but less useful for forecasts
Time frames	Short-term (days, weeks, months)	Long-term (months, quarters)
Volatility	More volatile and sensitive to short-term fluctuations	More stable and resistant to short-term fluctuations
Usage	Investors, entrepreneurs, policymakers	Economists, analysts, economic historians

3 Basic Macroeconomic Indicators: GDP, Inflation, and Unemployment Rate

While there are many popular macroeconomic indicators, and anyone can create their own unique way of measuring economic health, we distinguish three basic ones that are widely used worldwide and are most often discussed when assessing the condition of local and global economies:

Gross Domestic Product (GDP)
Inflation, or the decrease in the purchasing power of money (price increase)
Unemployment rate, or the percentage of people not engaging in work

Gross Domestic Product (GDP)

Gross Domestic Product, commonly known as GDP, is a key economic indicator that measures the total monetary value of goods and services produced within a country’s borders in a specific period, usually a year or quarter.

GDP includes various components of economic activity:

Consumer spending: Purchases of goods and services by households
Business investments: Capital expenditures by companies
Government spending: Expenditures on public services and infrastructure
Net exports: The difference between exports and imports

Moreover, GDP can be calculated and presented in different ways:

Nominal GDP: Measures output at current market prices
Real GDP: Adjusts for inflation to provide a more accurate picture of economic growth
GDP per capita: Divides total GDP by population to estimate average standard of living

In daily analysis, we usually compare the growth or decline rate of the indicator, i.e., its dynamics. When we see information that GDP was 3% in August, it most likely means that it increased by three percentage points compared to the previous period (for example, the past month or year).

The chart shows the US annual GDP growth rate. Source: Trading Economics

How to interpret GDP?

GDP growth indicates the overall condition and expansion of the economy
Positive GDP dynamics are generally viewed as good, while negative ones may signal a recession
Real GDP growth of 2-3% annually is often considered healthy for developed economies

Inflation

Inflation is a sustained increase in the general price level of goods and services in an economy over time. This economic phenomenon decreases the purchasing power of money, meaning each unit of currency buys fewer goods and services than before.

Although inflation can decrease the value of savings and income and discourage investment, moderate inflation is considered a sign of a healthy, growing economy. Many central banks aim for a low, stable inflation rate, typically around 2-2.5%, to maintain price stability while supporting economic growth.

Measuring inflation usually involves tracking price changes in a basket of commonly purchased goods and services. The Consumer Price Index (CPI) and its dynamics are among the most frequently used tools.

When inflation is 10% year-over-year, it means that the prices of the basket of goods have increased by ten percentage points. In other words, $100 from a year ago can now buy goods worth $90.

The chart shows the US annual inflation rate. Source: Trading Economics

How to interpret inflation?

Low and stable inflation (about 2-3% annually) is usually seen as ideal in developed economies
Very high inflation reduces purchasing power and can harm economic growth
Deflation (negative inflation) can also be problematic as it leads to reduced spending and investment

Unemployment Rate

Although it’s mistakenly assumed that the unemployment rate shows what percentage of society doesn’t have a job, this isn’t entirely true. This macroeconomic indicator actually measures the percentage of the labor force that is without work but actively seeking employment. People not interested in taking up work, i.e., not registered as unemployed, are not included in the statistics. The unemployment rate is calculated by dividing the number of unemployed by the total labor force and multiplying by 100.

Economies aim to reduce the unemployment rate, but it’s believed that a value that is too low can also be bad for the economy. No country wants it to dangerously approach zero, as this would mean a lack of necessary workforce.

The chart shows the US unemployment rate. Source: Trading Economics

How to interpret the unemployment rate?

Lower unemployment is generally better, indicating that more people are employed
However, very low unemployment (below 3-4%) may signal labor shortages
A “natural” unemployment rate of about 4-5% is often considered healthy

Moreover, these three indicators described above can present a different picture of the economy separately than when analyzed together. Let’s look at a few examples:

Strong GDP growth, low, stable inflation, and low unemployment generally indicate a healthy economy
High GDP growth with rising inflation may signal an overheating economy
Low GDP growth with high unemployment suggests economic weakness
High inflation, slow GDP growth (or lack thereof), and high unemployment rate signal stagflation

What Other Macroeconomic Indicators Should You Pay Attention To?

The trio of macro indicators described above is undeniably the most important, but many more relationships can be tracked in the economy. Below, we present a list of 10 other macroeconomic indicators that you should have on your watch list as an investor:

Consumer Confidence Index: Measures buyers’ optimism about the overall state of the economy and their personal financial situation.
Purchasing Managers’ Index (PMI): This index assesses the condition of the manufacturing sector by surveying supply managers in companies about production levels, new orders, and inventories.
Retail Sales: Tracks consumer spending on goods, providing insight into overall consumer demand and economic activity.
Industrial Production: Measures the output of manufacturing, mining, and utility sectors, reflecting the economy’s production capacity.
Trade Balance: Shows the difference between a country’s exports and imports, indicating international competitiveness and capital flows.
Housing Starts: Measures the number of new residential construction projects, serving as a leading indicator for the housing market and related industries.
Durable Goods Orders: Reflects business and consumer demand for long-lasting products, signaling future manufacturing activity.
Capacity Utilization: Indicates the percentage of total production capacity currently in use, suggesting potential inflationary pressure.
Money Supply: Measures the total amount of money in circulation, influencing interest rates and overall economic activity.
Yield Curve: Compares short-term and long-term interest rates, potentially forecasting economic growth or recession.

As an investor, pay attention to the industrial PMI indicator for the US economy (as well as other economies). When it’s above 50 points, economic prospects are growing. The readings below suggest that entrepreneurs fear a recession.

Economic PMI for the US economy. Source: Trading Economics

Macro Indicators and Financial Markets

Macroeconomic data often shape investors’ expectations and risk tolerance. Positive values tend to increase confidence and encourage risk-taking, while negative data can lead to aversion. For example, strong GDP growth or low unemployment can trigger stock market rallies as investors expect higher corporate profits.

In this context, a stock market index will also be a macroeconomic indicator (leading). If the index rises, the stocks of companies included in it rise, and investor confidence in the given economic situation grows.

When there’s a global economic crisis, stock indices usually lose value. S&P 500 chart. Source: Stooq.pl

Macroeconomic indicators will affect not only investor confidence and company results but also a range of other factors, such as:

Monetary Policy: Changes in interest rates or quantitative easing programs are reactions to economic indicators, for example, excessive inflation growth
Exchange Rates: Good economic data often leads to currency appreciation, as it may signal future interest rate hikes
Bond Market: Inflation and GDP growth data significantly affect bond yields. Higher-than-expected inflation leads to increased bond yields as investors demand higher returns to offset the decline in purchasing power

Macroeconomic indicators serve as important signposts for countries and investors, influencing asset prices, volatility, and overall market dynamics across different time frames. If you want to invest, you can’t afford to ignore them.