Major Indexes on Economic Cycle

An economic index (or indicator) is a piece of statistical data to indicate the direction of an economy or to judge the overall health of an economy. The best source for economic indicators and releases can be found here.
The Federal Funds Rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.

The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy. The Federal Reserve implements monetary policy through the purchase and sale of securities in the open market by a central bank. The short-term objective of such actions is specified by the Federal Open Market Committee (FOMC).

The Federal Reserve controls the three tools of monetary policy - open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate.
The ISM Manufacturing Index (ISM Index) is published by Institute for Supply Management in the form of ISM Manufacturing Report On Business. It is considered by many economists to be the most reliable near-term economic barometer available. A reading of greater than 50 signals increased economic activity, less than 50 indicates a contraction and 50 corresponds to no change. The Report has been published monthly since 1931.

The ISM Index is released on the first day of each month, so it can greatly influence the behavior of investors and business confidence. It is a survey of purchasing managers who are at the forefront of their companies' supply chains. Manufacturers need to respond quickly to changes in demand, and they ramp up or scale back purchases of inputs to match demand.

By monitoring the ISM Index, investors can timely gauge the current economic conditions. When this index is increasing, investors can assume that the stock markets should increase because of higher corporate profits. The opposite can be thought of the bond markets, which may decrease as the ISM Index increases because of sensitivity to potential inflation.

The ISM index is based on data compiled from a survey of purchasing and supply managers. The survey is broadly diversified across all industries, weighted by each industry's share of U.S. gross domestic product (GDP). Survey respondents are asked whether activities in their organizations are increasing, decreasing or staying the same. The activities include new orders, production, employment, supplier deliveries, inventories, customers' inventories, commodity prices, backlog of orders, new export orders and imports.
The Employment Situation (Employment Index) is published on the first Friday of each month by the Bureau of Labor Statistics every month.

Early each month, the Bureau of Labor Statistics at U.S. Department of Labor announces the total number of employed and unemployed people in the United States for the previous month, along with many characteristics about them. These figures, particularly the unemployment rate, which tells investors the percentage of the labor force that is unemployed, receive wide coverage in the media and thus have great influences on investors' behavior and stock market movements.

The basic concepts involved in identifying the employed and unemployed are
  • People with jobs are employed.
  • People who are jobless, looking for a job, and available for work are unemployed.
  • The labor force is made up of the employed and the unemployed.
  • People who are neither employed nor unemployed are not in the labor force.

Other Notable Indexes on Economic Cycle

Other significant indexes on measuring economic conditions include the following. Additional source to obtain charts for economic indicators can found here.
  1. A Consumer Price Index (CPI) measures price changes of a basket of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. The annual percentage change in a CPI is used as a measure of inflation. The CPI is used to index the real value of wages, salaries, pensions, for regulating prices for changes in real values. The CPI is one of the most closely watched national economic statistics.
  2. The Retail Sales Index is a monthly measurement of all goods sold by retailers based on a sampling of retail stores of different types and sizes. The index is often taken as an indicator of the health of the economy as reflected by consumer confidence in purchasing trends. Released around the 12th of each month, the report publishes data from the previous month. The report does not include money spent on services.
  3. Gross Domestic Product (GDP) is a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly, revised monthly). GDP includes all private and public consumption, government outlays, investments and exports minus imports. GDP is a broad measurement of a nation’s overall economic activity.

The above indexes are the most important economic indicators we have selected for the reasons given above. If you believe that any other significant economic index should be included here, please contact us.