|Robert F. Mulligan, Ph.D.
WESTERN CAROLINA UNIVERSITY COLLEGE OF BUSINESS
Department of Economics, Finance, & International Business
These are some of the key variables
used to measure the performance of the U.S. economy.
|1. Interest rates high interest rates indicate tight monetary policy because the supply of money is low compared to the demand. Low interest rates indicate loose monetary policy because the supply of money is high compared to the demand. The lower interest rates are, the cheaper it is to finance business activity, but if the government promotes artificially low interest rates, lots of funds are invested in activities with a low rate of economic return. This malinvestment pays off at the low interest rate but would not pay off at the "proper" interest rate and the economy becomes burdened with an unproductive capital stock, and short-term economic welfare is purchased at the expense of long-term growth.|
|2. Durable goods these are large-expense items purchased by business firms, like heavy equipment. If money is tight, firms will put off ordering this equipment as long as possible, but if they anticipate an increase in prices (either of their inputs or output, or both) they will buy durable goods as soon as possible.|
|3. GDP and the GDP growth rate this is the broadest measure of economic performance, and is compared to previous years growth rates to say whether the economy is growing faster or slower than in the past. GDP is only observable on a quarterly basis. The index of industrial activity is a monthly variable which is often used as a proxy for GDP.|
|4. Consumer Price Index the price of a basket of typical consumer goods, divided by its price in a base year. This is the most commonly used measure of price inflation and is used to adjust social security payments. The CPI overstates the impact of inflation because it does not permit substitution among goods, the major strategy with which consumers respond to price changes. The basket of goods is periodically revised to reflect long-term changes in consumption patterns. The method of computing the CPI is being changed to allow for substitution, and this is expected to lower the CPI by 0.02% per year on average.|
|5. Producer Price Index this tracks the price of the key raw materials which go into consumer products. This is a better indicator of future inflation than the CPI because price increases in the PPI are usually passed on to consumers with a lag of several months.|
|6. Housing Starts trends in housing starts indicate overall consumer confidence. Housing starts generally rise as the interest rate falls, and vice versa. The thirty-year mortgage rate responds to changes in interest rates set by the Fed, and housing starts respond to the mortgage rates.|
|7. The index of leading economic indicators this is a weighted index of twelve indicators, including the stock market and industrial capacity utilization. If youre having difficulty identifying relationships to use for forecasting, examine the indices of leading, coincident, and trailing indicators. Keep in mind the official indicies are weighted and have more parts (i.e., explanatory variables) than you are likely to use. The weights can be interpreted as indicating relative importance of a variable.|