Industrial Production, Business Confidence & Other Business Indicators

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Modern economies rely on the success of private businesses to drive gross domestic product (“GDP”), which measures the amount of goods or services produced by either the government or private businesses. By staying on top of business activity trends, international investors can ensure that they are investing in the most promising countries and sectors within those countries.

In this article, we’ll take a look at five economic indicators designed to measure the health of private businesses in a country’s economy and how international investors can use those indicators to improve their macroeconomic analysis.

Business Economic Indicators

There are many different economic indicators designed to measure the health of a country’s businesses, from measures of manufacturing inputs and outputs to surveys gauging confidence among executives. International investors may want to focus most of their efforts on the five most important indicators that are fairly universal among major developed and emerging market economies worldwide.

• Industrial Production . Industrial production measures the total economic output of the industrial sector of an economy, including manufacturing, mining and utilities. While these sectors only represent a portion of total GDP, they are highly sensitive to interest rates and consumer demand.

• Changes in Inventories. Changes in inventory usually represent the smallest component of GDP, but they are a very important indicator for investors to watch. Large changes signal changes in aggregate demand, which can predict future economic activity for a high degree of accuracy.
• New Orders. New orders measure the value of all legally binding contracts between producers and consumers for future delivery. Often times, these orders are broken down by industry, which can provide investors with insights into the economic health of specific sectors.
• Construction Output. Construction output measures the total value of construction work within a country. Since construction is correlated to a bullish economic outlook, international investors may want to keep an eye on the measure as a leading indicator for the overall economy.
• Business Confidence. Business confidence indicators survey executives of private companies within a country to gauge their sentiment. Unlike other indicators, the qualitative data in these reports looks further into the future by going directly to the decision-making sources of private enterprises.

There are many other economic indicators measuring business activity that weren’t mentioned above that international investors may also want to consider. For example, international investors focused on a specific sector within a country may want to look at economic indicators designed to exclusively measure that sector (e.g. energy companies have their own indicators that account for inputs).

Using Indicators for Prediction

Economic indicators measuring business activity can provide strong insights into the current health and future potential of a country’s economy. Strong business activity can translate to higher employment, rising wages, and a stronger consumer class and vice versa. Except for government-related inputs, business activity also accounts for the majority of a country’s GDP.

Despite the many benefits of measuring business activity, investors must be careful to take the entire economic picture into account. For example, rising business activity could be the result of low interest rates rather than an actual improvement in underlying consumer demand. Labor dynamics and interest rates, in particular, are important to consider when looking at trends in business activity.

Key Takeaway Points

• Private business activity makes up a significant portion of a country’s GDP, which measures the total production of goods and services.
• International investors should focus on five key indicators of business activity, including industrial production and business confidence.
• When using these indicators, international investors should carefully consider the figures in a wider context that includes labor and interest rates.