The Top 10 Economic Growth Indicators and How to Spot Them
Are you trying to measure the rate of growth of a particular economy? There are a number of indicators that you can use to find out if an area’s economy is in fact growing or slowing down. Learn about the top 10 economic growth indicators and how to spot them here.
Gross Domestic Product is the first area to look as it’s one of the primary indicators of an economy’s health. It represents the total value of all the goods and services produced in a country over a specific time period. If GDP is increasing, it’s a sign that the economy is growing, and vice a versa. Economists also use GDP statistics to determine if a recession is imminent. However, it should be noted that GDP can be misleading, especially if the government is spending more money to stimulate the economy or correct recession fallout. That’s why it’s important to review other indicators as well to get a more thorough outlook.
Employment and Income
When the economy is healthy, businesses hire more employees to meet the growing demands. This often results in low unemployment rates and increased wages that contribute to consumers having more buying power. Having more disposable income can relate directly to an upswing in GDP, the stock market, retail sales, and it can even stimulate the housing market. Having said that, it’s also important to remember that employment often lags behind economic growth, especially after a recession since many businesses will often wait until they’re completely convinced that a recovery has succeeded before hiring again.
Many people rely on the stock market to determine the state of the overall economy since stock prices are based on what companies are expected to earn. A growing economy will usually mean higher earnings for businesses and higher stock prices overall. The stock market, however, should never be solely used when determining growth potential as the individual stocks and market can easily be manipulated or inflated, and earning estimates can also prove to be wrong.
The strength of the economy can also be analyzed by looking at how much demand there is for consumer goods. More demand usually equates to an increase in employment and an increase in manufacturing activity, both of which signal a healthy economy. Also, look at the total amount of retail sales to determine if the products are in fact moving out of inventory. You can find statistics related to Canadian industries by using the Manufacturing statistics produced by Stats Canada, or by following the HIS Markit Canada Manufacturing Purchasing Manager’s Index, which measures the performance of the manufacturing sector.
Retail sales, alongside manufacturing data, can help determine whether an economy is improving or not. For instance, strong retail sales indicate that consumer confidence is up. Plus, more sales equates to companies hiring more employees to sell and manufacture products – further increasing the GDP. Details regarding US retail sales can be found in a monthly measurement of the US retail industry by the Census Bureau, while here in Canada, Statistics Canada measures the country’s retail sales growth over a specific period of time.
Balance of Trade
The difference between the value of exports and imports will determine whether more money is coming into the country or leaving it. Economists use the indicator to measure the activity of the manufacturing sector and foreign trade flows. A country that imports more goods and services than it exports is considered to have a trade deficit. Countries with trade deficits often have significant domestic debt which can lead to a devaluing of the currency. Trade surpluses, on the other hand, often indicate high productivity and often signals that the economy is growing and doing well.
Economists also look to building permit values to determine whether an economy is growing or not. A rise in building permits often indicates a demand for new real estate. Housing stats are vital indicators of healthy economies, as people are more likely to buy new homes when the economy is strong. Low numbers of new construction permits can indicate an economic slowdown is approaching or that an overheated market is returning to normal.
It goes both ways - the economy can directly affect the housing market and the housing market can directly impact the economy. Any increase or decline in housing prices can give insight to the state of the economy. For instance, if prices are dropping, it’s usually an indication that sales have also declined. This can have a negative impact on the economy in a number of ways. Most notably, this includes reduced construction jobs to build new homes, reduced property taxes to the government, and less homeowner wealth. Conversely, when the economy is growing, certain parts of the housing market will see rapid growth.
Financial advisors also look to business startup indicators to determine if the economy is growing or shrinking. If more businesses can launch easily, it’s an indication that the economy is strong. Startups also bring new innovation and employment that can further stimulate growth.
The Consumer Price Index (CPI)
The CPI is considered to be a true Cost of Living index. It directly reflects inflation and is calculated by measuring the average increased costs of essential goods and services, like medical care, vehicles, and electronics over a specific period of time. A consistent rise in CPI will promise economic growth. But if the inflation rate becomes too high, it can negatively impact consumer’s purchasing power and result in a decreased standard of living as people cannot afford the basic amenities. Deflation, on the other hand, can give people more purchasing power, but if there’s a persistent dip in prices, it could demonstrate that consumers are cutting back on spending, which means you can expect the economy to be in bad shape.
As you can see, not everything is black and white – there are many complexities when it comes to economic growth indicators and how to spot them. That’s why it’s important to talk to a financial expert when it comes to analyzing the markets. At the --------------- we provide our clients with current data and up-to-date information on their region’s assets, trends and overall growth. Our benchmarking reports can help economic developers get a clear picture on how their region measures up against their main competitors. To learn more contact us today!