Source: Image of Business Cycle created by Kate Eskra
Hi. Welcome to Economics. This is Kate. This tutorial is on coincident indicators. As always, my key terms are in red and my examples are in green. So in this tutorial we'll talk about how economists use data to study the economy and I'll define and give you an example of a coincident index.
Here's a business cycle and this is how we can take a look at how normal it is for the economy to go through periods of growth and contraction. We measure growth by our economy's gross domestic product or our output. And so while it rises, we're in a period of expansion, then we peak and we enter a period of contraction. Most people are basically concerned about what's the unemployment rate, what's inflation going to be, et cetera.
But economists have a lot of different kinds of data to help them do certain things. Certain data helps them predict where the economy is headed from here. So what will the future hold? Other kinds of data help economists to explain what has just occurred in the economy. And finally, other kinds of data help economists look at what is currently happening in the economy. And that's, in this tutorial, where we're focusing on what is happening right now.
Economists study what's called economic indicators, which give an overall view of the economy at any given point in time. There are three different categories-- leading, lagging, and coincident. We are focusing on the coincident indicators right now. A coincident index are indicators that provide a view of the current state of the economy. So these are indicators that change with the economy, not before and not after. And so they give us an idea as to where our economy is on that business cycle that I showed you. Are we in a period of economic growth right now? Are we in a period of economic contraction right now?
The most common coincident indicator is consumer confidence so that's the one that I'm going to talk about. Consumer confidence is not actually measured by the government. It's measured each month by The Conference Board, which is an independent economic research organization. And what they do is they survey 5,000 households. They can't figure out every single person's confidence in the entire country at any given time. They survey 5,000 households a month.
And if you were surveyed, you would be asked about your opinions or your attitudes on the current economy and where you feel the economy is headed. Even though you're not an economist, that's not what they're interested in. They want to know how the average person feels about the economy. And almost more importantly, they want to know how is your attitude or your opinion on the economy going to impact your spending and your saving intentions. So are you going to be spending a lot of money this month, this year, et cetera? How about saving money?
Consumer confidence actually tells us a lot about the economy. So let's go through it. If consumers are really confident, if they find in these surveys that consumers feel really good about where the economy is and where the economy is going, then we find that consumers continue to make purchases. And purchases beyond just what's absolutely necessary like rent and homeowner's insurance and all those home costs and grocery shopping. Instead, consumers make additional purchases. They plan a summer vacation with their family, for example. They continue to dine out at restaurants.
And those things mean a lot to businesses. These kinds of purchases, this kind of consumer demand, keeps firms profitable. And that's good for us. Firms then keep producing and that means they need to retain their employees. When they're retaining their employees, these employees now continue to have paychecks. Those paychecks allow people to have jobs, having money to continue spending in other businesses.
So then those businesses can continue producing and retaining employees. And you can see, it's very cyclical, hence the name of a business cycle. If people have the money to continue spending, our economy tends to continue improving. But if consumers respond that they are pretty confident, that's an indication that we are currently, right now, in an period of economic growth.
On the opposite side of it, if consumers are responding that they're even slightly fearful of the future economy then what they're doing is they're tending to save any extra money. They choose not to go on that summer vacation. They'll eat in more often than dining out. This drop-off in spending is really going to impact firms. Firms are now going to scale back on production and they're going to need to lay off employees to maintain their profitability. And now we know that people without jobs who are laid off don't have the money to continue spending and the economy tends to even get worse.
So how can this be studied in microeconomics? Remember microeconomics studies individual firms and individual consumers. So quite simply, a microeconomist would study individuals' expectations about the economy, their confidence or their fear. A microeconomist might also consider the impact that this confidence is having for specific firms or for specific industries.
In this tutorial, we talked about how economists use data to study the economy overall and individual markets and we talked specifically about coincident indicators, which show us where our economy is currently. And finally, the Consumer Confidence Index is an example of a coincidence indicator Thanks so much for listening. Have a great day.
Indicators that provide a view of the current state of economy.