Blog

Economic indicators and influence in the decision-making

Economic indicators

Among the other influential economic indicators that can rattle financial markets are consumer prices, industrial production, retail sales, and new home construction. It is precisely because these indicators can so easily sway the value of investments that the government takes extraordinary steps to control the flow of sensitive economic information.

Thirty forty years ago, barely any guidelines applied to the release of economic reports. The lack of strict ground rules on the publication of these influential statistics created the perfect climate for abuse. Politicians tried to control the release of economic news to score points with voters.

After all, at least 2 key economic indicators are released on a weekly basis, more than 20 every month, and at least the same indicators each quarter.

Do we really need so many measures? Absolutely. The actually economy of Albania is kind of complex economy. No single indicator can provide a complete picture of what the economy is up to. Nor is there a simple combination of measures that provide a connect-the-dots path to the future. At best, each indicator can give you a snapshot of what conditions are like within a specific sector of the economy at a particular point in time.

When you piece all these snapshots together, they should provide a clearer picture of how the economy is faring and offer clues on where it is heading. Yet even if you took the time to absorb every bit of economic information and monitored each squiggle in the indicators, don’t expect to uncover a crystal-ball formula that can single-handedly forecast what consumer spending, inflation, and interest rates will do in the months ahead.

That’s because there are some important caveats when dealing with economic indicators. First, they often fail to paint a consistent picture of the economy. Different indicators can simultaneously flash conflicting signals on business conditions. One can show the economy improving, while another may point to a clear deterioration.

For example, the government might report a drop in the unemployment rate, normally a bullish sign for the economy. However, a different employment survey might show a day or two later that companies are laying off workers in record numbers. You’re now presented with two contradictory portraits on labor market conditions, both covering the same time period.

Which should you believe?

Just look at two ostensibly related reports: consumer confidence and consumer spending. The first measures the general mood of potential shoppers; if they are upbeat about the economy, it stands to reason they will spend more. If there is widespread gloom and uncertainty about the future, logic would lead you to believe people will curb their spending and save money instead. However, that’s not the way it plays out in the real world. There appears to be little relationship between these two measures.

During the last and first years of this decade, consumer confidence kept plummeting throughout the years, reaching levels not seen in decades. Yet these same consumers not only refused to cut back on spending these years, they expended a lot of money they didn’t had in their hands. Obviously, one cannot determine the outlook for consumer spending just by monitoring the psychological state of Albanian households. The inclination to spend is influenced by many factors, including personal income growth, job security, interest rates, and the build-up in wealth from the value of one’s home and the ownership of capital values.

Generally, the most influential statistics, those most likely to shake up the capital, consumer expenditure, import and export and currency markets, possess some of the following attributes:

Accuracy: Certain economic measures are known to be more reliable than others in assessing the economy’s health. What determines their accuracy is linked to how the data is compiled. Most economic indicators are based on results of public surveys. Getting a large and representative sample is thus a prerequisite for accuracy. For instance, to measure the change in consumer price inflation, the government’s Bank of Albania and INSTAT sends out agents and conducts telephone interviews every month to find out how much prices have changed on hundreds of items and services at other hundreds of retail shops around the country.

Another variable is the proportion of those queried who actually came back with answers. How quickly did they respond? The bigger and faster the response, the better the quality of the data and the smaller the subsequent revisions. If an indicator has a history of suffering large revisions, it generally carries less weight in the financial markets. After all, why should an investor should invest or a company hire additional workers when the underlying economic statistic is suspect to begin with?

Timeliness of the indicator: Investors want the most immediate news of the economy that they can get their hands on. The older the data, the more yawns it evokes. The more current it is, the greater the wallop it packs on the markets.

Case in point: Investors pay close attention to the employment situation report because it comes out barely a week after the month ends. In contrast, there’s far less interest in the consumer installment credit report, whose information is two months old by the time it’s released.

The business cycle stage: There are moments when the release of certain economic indicators is awaited with great anticipation. Yet those same indicators barely get noticed at other times. Why do these economic measures jump in and out of the limelight? The answer is that much depends on where the Albanian economy stands in the business cycle[1]. During an economic crisis or stagnation of economy which mean a recession, when there are lots of unemployed workers and idle manufacturing capacity, inflation is less of a concern. Thus, measures such as the consumer price index, which gauges inflation at the retail level, do not have the same impact on the financial markets as they would if the economy were operating at full speed. During recessionary

periods, indicators that grab the headlines are consumer index because this often provide the earliest clue that an economic recovery is imminent. Once business activity is in full swing, inflation measures like the CPI take center stage again while the other indicators recede a bit to the background.

Predictive ability: A few indicators have a reputation of successfully spotting turning points in the economy well in advance. We mentioned how basic consume sales as well as the immovable assets have such characteristics. However, other less known measures are harbingers of a change in business activity. One such indicator is the advance orders for durable goods. Generally, economic gauges known for being ahead of the curve carry more weight with investors.

Degree of interest: Depending on whether you're an investor, an economist, a manufacturer, or a banker, some indicators might be of greater interest to you than others. Business leaders, for instance, might focus on new real estate sales and existing one’s figures to see whether Albanian are in a shopping mood. By monitoring such statistics, companies selling furniture and appliances can decide whether to expand operations, invest in new inventories, or shut down factories.

It may be hard to believe all this action and reaction can be triggered by just a single statistic.

[1] The business cycle is a recurring pattern in the economy consisting first of growth, followed by weakness and recession, and finally by a resumption of growth again