(Flickr: bold army)

There is talk about town and in the media of an economic upturn in the final quarter of 2009 – “banks are lending, consumers are buying, and companies are hiring.”  While it is not possible to predict the movement of the economy with any level of certainty, and recent history has reminded us of this fact, it is important for business people and government policy makers to have some idea of what lies ahead.

The practice of reading omens in order to foretell the future has been employed since ancient times. In ancient Rome, priests known as “Augurs” would determine the will of the gods by studying the flight of birds, while other persons known as “Haruspices” practiced a form of divination which involved inspecting the entrails of sacrificed animals.

Things have progressed a little since then. Today economists devine the future by examining “economic indicators”.

Economic Indicators

In order to assess the likely strength of the economy in the future, economists look at “economic indicators”.

An economic indicator is any economic statistic (e.g. the unemployment rate, GDP, or the inflation rate), which indicates the current strength of the economy and/or the future strength of the economy.

Economic indicators are generally classified by reference to  two attributes:

1. Correlation with the strength economy; and
2. Contemporaneousness with the strength of the economy (let me know if you can think of a simpler word)

1. Correlation

If an economic indicator is “correlated” with the economy, then we would expect a change in the value of the economic indicator to correspond with a movement in the economy.  The correlation of an economic indicator may be described as procyclical, countercyclical, or acyclical:

1. Procyclical: A procyclical economic indicator is one that moves in the same direction as the economy. For example, Gross Domestic Product (GDP) is a procyclic economic indicator because it gets larger as the economy gets stronger.
2. Countercyclical: A countercyclical economic indicator is one that moves in the opposite direction as the economy. For example, the unemployment rate is a countercyclical economic indicator because it gets larger as the economy gets weaker.
3. Acyclical: An acyclical economic indicator is one that has no relationship to the economy and is generally of little use in predicting the future strength of the economy.

2. Contemporaneousness

Contemporaneousness refers to the timing of the change in the economic indicator relative to the movement in the economy.  The contemporaneousness of an economic indicator may be described as leading, lagged, or coincident:

1. Leading: A leading economic indicator changes before the economy changes. For example, construction activity is a leading indicator as the level of construction activity usually begins to decline before the economy declines and improve before the economy improves. Leading economic indicators are the most important type of indicator for investors, business people and policy makers because they help to predict the future performance of the economy.
2. Lagged: A lagged economic indicator is one that does not change direction until a few quarters after the economy does. For example, the unemployment rate is a lagged economic indicator because it typically takes at least two quarters to decrease after the economy begins to recover.
3. Coincident: A coincident economic indicator is one that moves at the same time as the economy does. For example, Gross Domestic Product is a coincident indicator.