Underrated And Overrated Economic Indicators

By Last Edited Mar 21, 2023

Today, we will look at what I think are the three most useless economic indicators that investors and traders should ignore on their Eco-calendars. Similarly, I have indicated what I think are the top six most undervalued indicators that tell us more about the economy and can help us understand exchange rate movements better (and potentially make short-term predictions).

What Are Economic Indicators And What Is Their Purpose?

Economic indicators are statistical data points or metrics that provide insight into an economy’s overall health, direction, and performance. These indicators are critical tools for governments, businesses, investors, and individuals to make informed decisions about their economic activities. By tracking various economic indicators, stakeholders can assess current conditions and identify emerging trends, ultimately aiding in developing appropriate policies and strategies for sustainable growth.

There are numerous economic indicators, each of which serves a specific purpose in measuring different aspects of an economy. Some indicators focus on overall growth and output, while others examine employment, inflation, or consumer behaviour. Typically, economic indicators are classified into three categories:

Leading Indicators: These are forward-looking indicators that tend to change before the economy experiences a shift. They can be used to predict future economic movements, making them valuable for decision-makers. Leading indicators include stock market performance, new housing permits, and consumer sentiment surveys.
Lagging Indicators: As the name suggests, lagging indicators change after the economy has experienced a shift. These indicators are useful in confirming the direction of economic trends and determining the effectiveness of policy measures. Examples of lagging indicators include unemployment, inflation, and labour productivity.
Coincident Indicators: Coincident indicators change simultaneously with the economy, providing real-time information about current economic conditions. They help assess the current state of the economy and identifying potential turning points. Examples of coincident indicators include industrial production, personal income, and retail sales.

The purpose of economic indicators is to offer valuable insights into various aspects of an economy, enabling stakeholders to make informed decisions. Governments rely on economic indicators to develop and adjust fiscal and monetary policies that promote growth, stability, and job creation. Businesses use these indicators to identify market trends, assess risks, and make strategic decisions related to investments, expansion, and resource allocation. Conversely, investors utilize economic indicators to evaluate investment opportunities and manage their portfolios effectively.

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Three Most Overrated Indicators 💰

1. GDP

The GDP data is produced quarterly and invariably triggers a substantial market reaction, but the data is questionable in its usefulness, especially as it is backwards-looking. Headline GDP data also makes no allowance for population changes and does not measure GDP per capita

GDP data from all countries are prone to substantial revisions over the following months and years. Data which suggests economic contraction can easily be revised away over the following few quarters and vice versa.

For example:

* US GDP

The US GDP data is annualised, which makes relatively small deviations appear more significant than is the case. For example, if GDP rises 0.3% in the quarter, this will be reported as an annualised rate of 1.2%. Quarterly growth of 0.5% would be reported as 2.0%. In statistical terms, a relatively small deviation from the consensus will look like a much bigger miss.

* UK GDP

The NIESR produces monthly GDP growth estimates, which are released significantly earlier than the official GDP data.

* China GDP

The Chinese data is vulnerable to considerable manipulation, and, in general, other data releases on the economy are much more important indicators of underlying growth trends.

2. UK retail sales

The data can provide important information on trends in retail sales, but there is a high degree of monthly volatility and the risk of significant revisions. It is also difficult for the data to pick-up wider trends in consumer spending, which is more valuable than the narrow focus on retail spending.

The British Retail Sales Consortium (BRC) also provides earlier data on retail sales. The data impact is limited, especially as it is released during the UK night-time.

3. Australian employment data

The Australian employment data is produced monthly, but it is prone to substantial revisions, and there have been major issues with the reliability of this data in the past with major problems over seasonal adjustment.

Six Most Underrated Indicators 💹

1. Money supply growth

Money supply data from major economies usually receive very little attention. There was a flurry of interest in the Eurozone data at the height of the economic crisis within the Eurozone, but this has faded again.

US data receives almost no attention, and most calendars do not even carry the US release. Money supply growth is, however, a key economic variable and a bed-rock of central bank economic policies. Importantly is also a key leading indicator as strong money supply growth suggests growth will strengthen within the next few months. A sharp weakening of growth is an important warning sign that growth is liable to weaken.

2. Euro PMI data

The Euro-zone PMI data on the industrial and services sectors should gather more attention. Headline data does receive some market focus, but very little attention is paid to data on employment and prices. This data is, however, a crucial leading indicator of trends in prices and employment. Survey responses will give crucial insights into hiring and pricing intentions before they show up in official data.

3. Euro-zone current account

Ultimately, currency values are determined by supply and demand conditions. The Euro-zone current account data provides important evidence on underlying balance of payments trends, especially as there is also data on capital flows which will have an important impact on underlying Euro levels.

4. Australia MI Inflation index

This indicator receives relatively little attention, especially as the data is supplied to subscribers only. However, Australian consumer inflation data is only released quarterly, and the MI inflation data gives important insights into underlying inflation trends.

5. Australia PMI data

Australian PMI data produced by AIG covers the manufacturing, construction and services-sector index. The data is often overlooked but provides important intelligence on overall trends in the economy.

6. China Caixin PMI data

Caixin produces monthly PMI data on the Chinese economy for both the manufacturing and non-manufacturing sectors. The release includes data on orders, employment and prices and provides important evidence on underlying trends in the Chinese economy.

Why are some indicators misrepresented in the media

A barrage of economic data is released on most trading days (view our up-to-date economic calendar). Market and media attention focus on the ‘major’ releases which create big moves in currencies, bonds and equities. Looking beyond immediate reactions, these releases can offer little insight and be potentially misleading, with lower-profile data releases often having greater significance for underlying trends.

Remember: Over-hyped data still move markets

Great care is needed here as the over-hyped event still triggers a very substantial market reaction, at least in the short term. If an indicator is seen as a big market mover, there is no point trying to deny this and the data must be treated with respect as short-term players can move prices sharply.

The debate surrounds whether the moves seen are actually justified and whether big moves can be taken advantage of from a longer-term perspective, given that the more important data may be signalling a different outlook and trend.

Events also move up and down a league table of importance, with some indicators gradually increasing while others fading over time. To some extent, this will be cyclical, with certain indicators more useful in times of strong growth while others are important in a recession.

Forward versus backwards-looking

One of the most important aspects of data is whether it tells you what has happened or indicates what is likely to happen. From a trading perspective beyond the very short term, it is much more important to know what is likely to happen next.

It is also important to focus as much as possible on data which tells you what is actually happening rather than what consumers, experts or companies think is happening.

Summary: Some data is not included on calendars so make your own calendars!

It should also be noted that many important data releases never even make it on to market calendars. These include fears such as national and global freight trends, power consumption, restaurant sales and job ads. These indicators are particularly important if they all point to a certain trend. View live example with the Pounds drop against the Euro.

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