Three Aspects to Consider When Looking at a Financial Indicator

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As the global economic crisis rolls on, it has become important to track financial markets. When looking at a financial indicator, there are three aspects that must be considered. Check additional information about Financial Indicator.

As the repercussions of the global financial crisis continue to affect countries and economies worldwide, it has become of utmost importance to be able to ascertain the exact conditions of the market. In volatile times such as these, even small fluctuations may hold the key to both influencing and predicting future behavior. As such, picking the right financial indicator or indicators to keep track of can be the key to a successful predictive financial strategy. In doing so, several aspects of an indicator should be considered and kept in mind, in order to make the best informed choices. After all, as much as we would like to do so, we cannot hope to keep up with the infinite possible economic indicators, and we must make do with some finite subset.

One such aspect is the indicator's relationship with the business cycle, or the overall movement of the economy, whether it is in a period of growth, or in one of recession. A procyclic indicator would increase as the economy grows and decreases as it shrinks; an example would be the gross domestic product or GDP, which measures the total economic output of a country. A countercyclic indicator, on the other hand, as the term might imply, moves in the opposite manner that the economy moves. The unemployment rate is an excellent example of this, since a high unemployment rate would indicate a struggling economy, and vice versa. There are also so-called acyclic indicators that have no significant relation to the business cycle and, as can be expected, they are of little use.

Another aspect that must be seriously considered is an indicator's frequency, or how often it is updated and released. Some indicators are released only quarterly, or every three months, such as the GDP. Others might be released on a weekly, daily, hourly, or even every minute, such as the Dow Jones Industrial Average. Generally, an indicator's frequency is tied both with the frequency of the data used in its calculation, as well as the necessary timeframes in the industry it is used in. The Dow Jones index, for instance, is used in the stock market, where real time fluctuations can often prove to be very significant. National economies, on the other hand, do not usually move as quickly; and hence, national indicators are usually released only monthly or even less frequently.

Finally, the timing of an indicator should also definitely be taken into account. This refers to how the movement of the economic cycle is related in time to the movement of the indicator itself. That is, for example, leading indicators make their move before the actual economy reflects the trend. Lagging indicators, on the other hand, are affected only after the economy itself has begun to move. Coincident indicators move along with economy.

Clearly, when looking at any financial indicator, these three aspects should be taken into consideration. When drafting a set of indicators to monitor, care should be taken to choose some from each category so that a balanced and accurate view may be obtained.

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