What is an economic indicator? An economic indicator is any piece of economic information that is often used by analysts, investors, and economists to make decision regarding the current or future investment possibilities within the economy.
Usually, economic indicators are of a macroeconomic scale so that they can be used to evaluate the the overall health of the country. For instance, if the GDP of Kenya (an economic indicator) were to rise steadily, international investors would flock into Kenya and the local investors will be incentivized to invest more in the country.
Different investors choose any piece of economic indicator to make investment decisions. Currently, even information released by NGOs can be followed by investors.
Below are some of the economic indicators in Kenya:
- The Consumer Price Index (CPI)
- Gross domestic product (GDP)
- Unemployment rates
- Price of crude oil
- Industrial Production
- Consumer spending is a good indicator that can be used by both the government and investors to gauge consumer health. Monthly personal income give insights into consumer spending and inflation by way of a price index. The price index monitors (factors for) changes in the amount of money used to spend on selected household items.
- Inflation is also another good economic indicator. It shows the general increase in the price level for goods and services in the economy. Too high inflation is not a positive indicator because it implies the economy is “overheating”. Interestingly, neither is a very low inflation a good indicator because it suggests a looming recession. The most common inflation indices used in Kenya are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). Sometimes, the Producer Price Index (PPI) is also used for producers.
- Home sales are a significant indicator for positive economic environment for investors and the government.
- Home building and the number of house permits that have been issued are an indicator for the confidence level that real estate developers have in the economy. A low rate of house building, as well as construction spending, is not a positive indicator for investors and the government.
- Manufacturing demand shows the demand for the manufactured products. Reports on manufacturers’ pending shipments, current inventories, and orders must be prepared to provide insights for government and investor decision making.
- Retail Sales – provides an analysis on the purchased made in supermarkets, furniture stores, and any other consumer goods.
When explaining the meaning of economic indicators, it is important to state the categories or groups they are divided to. There are three types:
- Leading indicators that predict the future because they will have to change first before the economy adjusts. They include the yield curve, consumer durables, net business formations, and share prices. However, these indicators are sometimes incorrect and as an investor, you should take them with a grain of salt. The Nairobi Stock Exchange may also serve as strong economic indicator, yet most investors are looking for indicators to be able to make decisions regarding buying company stock. The stock market is a good leading indicator because it focuses on future prices of shares. If stock prices are increasing, then the economy’s direction is also positive. Still, care should be taken as stock market prices can be influenced by the activities of corporations or some influential personalities by way of complex accounting practices and policies that may be either legal or illegal.
- Coincident indicators happen concurrently with the occurrence of other specific economic activities. They are more reliable than leading indicators, and are, consequently, relied upon by policymakers, economists, and investors.
- Lagging indicators are seen after an event has passed. It is a technical indicator that can be seen after significant economic shifts. They include the gross national product (GNP), CPI, unemployment rates, and interest rates.
Interpreting Kenyan economic indicators
The usefulness of an economic indicator is dependent on its correct interpretation. Many past studies have indicated that the economic growth of Kenya and corporate growth are strongly correlated. However, it will be impossible, and insufficient, to use GDP growth to make a decision on whether or not to invest in a company. For instance, Kenyan banks made good profits during the pandemic while other companies recorded losses. Good investors should use several economic indicators and use insights from a diverse set of data before making ant decisions.