19 Nov 2015Interdependency of Economic Indicators
The role of and interdependence of certain economic indicators has always attracted the attention of investors and economists alike. There has always been a debate on the aspect as to which economic factor Employment or Consumer activity affects the GDP more than the other.
The most important indicator of the health of an economy is its employment rate. It is widely recognized as a key indicator of labour market performance and closely watched economic indicator. The national unemployment rate is defined as the percentage of unemployed workers in the total labour force. The employment situation report also influences other important indicators, such as consumer confidence and consumer sentiment.
When workers are unemployed, they lose wages and the nation as a whole loses its contribution to the economy in terms of goods and services that could have been produced. Not just this, the unemployed population also loses its purchasing power, which can lead to unemployment for other workers, creating a vicious cycle that ripples through the economy.
The state of the labour market is of prime importance to the well-being of an economy. For e.g a weak labour market translates into lower profits for the corporations. The underlying reason for this effect is that when people are out of work, they cannot make the necessary purchases that drive corporate profits.
Consumer Activity / Consumer Confidence
Consumers make up a majority of economic activity in any economy; Consumer confidence measures how confident consumers are towards the overall state of the economy. Consumer activity reflects how confident they feel about their income stability, which in turn directly affects the economy as a whole. Consumer confidence usually rise with the expanding economy and decreases with a contracting economy. However, since the consumers do not have perfect information about the economy, their purchasing power discussed above influences their spending activity to a great extent.
Government agencies, banks, retailers etc. use various consumer sentiments to plan their actions. For e.g. if the consumer sentiment is weak and indicates a decline in consumer spending, retailers manufactures will decrease their inventories and production in advance. They might even delay their investment in new projects.
Consumer activity and employment rate are so inter linked and dependent that by looking at one we can predict the movement of the other.
GDP level are directly driven by the principles of demand and supply, an increase in demand leads to increase in GDP. Such an increase in demand must be accompanied by a corresponding increase in productivity and employment to keep up with the demand.
GDP, consumer confidence and unemployment rates are linked in the sense that all of them are macroeconomic factors that are used to study the health of an economy. GDP and unemployment rates usually go together because a decrease in the GDP is reflected in a decrease in the rate of employment.
A rise in employment levels is the natural result of increased GDP levels caused by an increase in consumer demand for goods and services. Therefore, such a rise in both GDP and employment levels is an indication that the economy is growing. During such periods, consumer activity is high and the demand for various goods and services are correspondingly elevated. In order to meet this surge in demand, manufactures and other types of companies hire more employees.