Economic indicators investors should know and watch
Guide Summary
- Economic indicators provide valuable insight into the state of the economy and are essential tools for beginner investors.
- Understanding how indicators interact and how markets respond can improve your investment strategy.
- No single indicator tells the full story. Always consider the broader economic context.
What is an economic indicator?
An economic indicator is a data point or set of statistics used to assess the performance of an economy.
Governments and independent agencies regularly publish these indicators to provide insight into economic activity, trends and turning points.
Economic indicators are usually grouped into:
- Leading indicators: Signal future economic activity.
- Lagging indicators: Confirm trends that are already occurring.
- Coincident indicators: Move in line with the economy.
Main economic indicators for markets
There are a variety of economic indicators investors in the UK tend to watch. Some of the main indicators relevant to investing include:
Gross domestic product (GDP)
- Measures the total economic output of a country (the value of goods and services produced).
- A key indicator of overall economic health and growth.
Consumer price index (CPI)
- Used to measure inflation, which impacts interest rates and purchasing power.
- Tracks changes in the price of a basket of goods and services.
Unemployment rate
- Reflects the percentage of the workforce that is jobless and seeking work.
- High unemployment rates may indicate economic distress. Low rates often signal economic strength.
Bank of England base rate
- The interest rate set by the central bank.
- Influences borrowing costs, mortgage rates and investment decisions.
- Learn how interest rates affect the stock market.
Purchasing managers’ index (PMI)
- A forward-looking indicator based on surveys of businesses.
- Indicates trends in manufacturing and services activity.
Retail sales data
- Tracks the value of goods sold by retailers.
- A measure of consumer spending and confidence.
Balance of trade
- The difference between imports and exports.
- A trade surplus or deficit can impact currency value and market sentiment.
Consumer confidence index
- Gauges how optimistic or pessimistic consumers feel about the economy.
- Often aligned with future spending behavior.
Wage growth
- Measures the pace at which average earnings are increasing.
- Impacts inflation and consumer spending power.
Interpreting economic indicators as an investor
Economic indicators rarely tell a complete story in isolation. Context always matters when it comes to investing. For example:
- Rising GDP might be positive, but if inflation is also climbing rapidly, it could signal overheating.
- Low unemployment might boost consumer spending, but it could also lead to rising wages and higher inflation.
As an investor, it’s essential to consider how indicators interact and how markets might react; not just what the numbers say.
How to use the stock market as an indicator
The stock market itself can act as a leading economic indicator. Equity markets often reflect investor expectations about future growth, interest rates and corporate earnings.
Key stock market signs to watch can include:
- Sustained market rallies often signal optimism about economic prospects.
- Sharp corrections or volatility may reflect economic uncertainty or risk aversion.
- Sector performance (such as consumer discretionary vs consumer staples) can hint at changing investor sentiment.
Learn more about the stock market.
Advantages of economic indicators
- Accessible and public: Most indicators are released on regular schedules and available to everyone.
- Helps identify trends: Indicators reveal patterns in economic growth, inflation, employment and more.
- Supports informed decision-making: Investors can use indicators to anticipate potential shifts in interest rates, asset prices or policy changes.
Disadvantages of economic indicators
- Lagging effect: Some indicators only confirm trends after they’ve occurred.
- Market overreaction: Markets and investors may respond emotionally or irrationally to a single data point.
- Interpretation required: Indicators can be complex or give conflicting signals.
Economic indicators summary
For new and aspiring investors, economic indicators serve as essential signposts that help explain what’s happening in the broader economy.
While they don’t predict the future with certainty, they offer valuable clues that can shape investment thinking and strategy. Understand how to build a passive income through investing.
By learning to interpret these signals, alongside other tools and personal financial goals, you can make more informed, confident investment decisions in an ever-changing market environment.
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment. Chip does not offer financial advice and this should not be considered as a personal recommendation.
