tracking the business cycle

potential output

the level of output that occurs when all resources are fully employed

business cycle

short-term fluctuations in economic activity; short-term deviations from potential output; causs the unemployment rate to rise and fall sharply

output gap

the difference between actual and potential output, measured as a percentage of potential output

output gap

(actual output - potential output)/potential output * 100

negative output gap

the economy is producing less than it can

bust

the economy is producing less than it can

positive output gap

the economy is producing more than its potential

boom

the economy is producing more than its potential

recession

a period of increasing economic activity

expansion

a period of increasing economic activity

comovement

variables that move up and down together

leaning indicators

variables that tend to predict the future path of the economy

lagging indicators

variables that tend to follow business cycle movements with a bit of a delay

Okun’s Rule of Thumb

links the output gap and the unemployment rate

Okun’s Rule of Thumb

for every percentage point that actual output is less than potential output, the unemployment rate will be around half a percentage higher

seasonally adjusted

data stripped of predictable seasonal patterns help you see underlying trends

annualized rates

data converted to the rate that would occur if the same rate had occurred throughout the year

revisions

updates to earlier estimates

top ten economic indicators

real GDP, real GDI, nonfarm payroll, unemployment rate, initial unemployment claims, business confidence, consumer confidence, inflation, employment cost index, the stock market

Real GDP

the broadest measure of economic activity; measures the total size of the economy; incomplete when first released

Real GDI

acts as a useful cross-check on GDP; total income

nonfarm payroll

tells you if the labor market is improving; tells you how many jobs are created each month by tracking the number of workers on businesses’ payrolls

unemployment rate

an indicator of excess capacity; share of the labor force that wants a job but can’t find one

initial unemployment claims

provies a timely indicator on how many people lose their jobs and applied for unemployment insurance during the previous week

business confidence

tells you what managers are planning

consumer confidence

tells you what consumers are thinking

inflation

tells you what’s happening with price levels

employment cost index

tells you what’s happening with wages; how fast wages and benefits are rising; leading indicator of inflationary pressure

five rules to track the economy

track many indicators, broad indicators beat narrow indicators, seek timely data and distinguish between leading and lagging indicators, find the signal amid the noise, adjust your outlook when data differs from expectations