Economic indicators
Why this matters
Section titled “Why this matters”In June 2022, prices paid by American consumers were about 9% higher than a year earlier. That was the fastest rise since November 1981 (BLS CPI; you can see it in the chart below). Almost nobody under 50 had lived through inflation like it as an adult.
That one number reshaped every market. The Federal Reserve raised interest rates at the fastest pace in decades, mortgage rates roughly doubled, and stocks and bonds fell together. If you’d understood what the inflation number was telling you, much of what happened next in 2022 made sense.
Macro investors spend their lives watching a handful of numbers like this one. This chapter teaches you the three most important: growth, inflation and unemployment. The next chapter shows the rhythm that ties them together, the business cycle.
GDP: the size of the economy
Section titled “GDP: the size of the economy”GDP (Gross Domestic Product) is the total value of everything a country produces in a period: every haircut, car, software subscription and loaf of bread. In the US it’s published every quarter by the Bureau of Economic Analysis (BEA).
Nobody cares much about the level of GDP. What matters is how fast it’s growing. An economy growing 3% a year is creating jobs and profits; one shrinking 2% is laying people off.
There’s a catch. If prices rise 5% and the economy produces exactly the same stuff, GDP measured in dollars still goes up 5%. That’s not real growth, just higher prices. So economists split GDP into two versions (nominal vs real):
- Nominal GDP is measured in today’s dollars, inflation included.
- Real GDP strips out price changes, so it only rises when the economy actually produces more.
When people say “the economy grew 2%”, they almost always mean real GDP.
Who has the biggest economy, and what powers it?
Section titled “Who has the biggest economy, and what powers it?”GDP also lets us compare countries. The United States and China are far ahead of everyone else, but their economies run on very different engines. In the US, household spending is about two-thirds of GDP: the economy is consumer-led. In China, households spend a much smaller share, and factories, construction and exports do more of the work: it’s production-led. That difference matters to macro investors. A consumer-led economy is most sensitive to jobs, wages and interest rates on loans; a production-led one is more sensitive to global demand, commodity prices and its currency.
When real GDP shrinks for a sustained period and the damage spreads across jobs, incomes and spending, that’s a recession. In the US, recessions are officially dated by a committee at the National Bureau of Economic Research (NBER). It often announces them months after they’ve started, because it waits for the data to be clear.
Inflation: the price of everything
Section titled “Inflation: the price of everything”Inflation is the rate at which prices in general are rising. If inflation is 3%, the same basket of groceries, rent and petrol that cost $100 last year costs $103 today.
The most-watched measure in the US is the CPI (Consumer Price Index), published monthly by the Bureau of Labor Statistics (BLS). It tracks the price of a typical household’s shopping basket. “CPI inflation” is simply how much that basket’s price has changed over the last 12 months.
A little inflation is normal, and even healthy. Most central banks aim for about 2% a year. Problems start when inflation gets high or unpredictable:
- Your savings shrink. Cash in a bank account earning 1% loses value when prices rise 8%.
- Planning gets hard. Businesses can’t set prices or wages with confidence.
- Central banks step in. To cool inflation, they raise interest rates, which slows the whole economy. That’s what happened in 2022, and it’s why investors watch inflation so closely.
Headline vs core, CPI vs PCE
Section titled “Headline vs core, CPI vs PCE”The CPI number in the news is headline inflation: it includes everything. Economists and central banks also watch three close cousins.
- Core CPI is CPI without food and energy. Food and fuel prices jump around with harvests, weather and wars, so stripping them out shows the slower-moving trend underneath. It doesn’t mean food and fuel don’t matter; it means they are noisy.
- PCE (the personal consumption expenditures price index) is a second measure of consumer prices, published monthly by the Bureau of Economic Analysis (BEA). It covers a wider range of spending, including things paid for on people’s behalf, such as employer-provided health insurance. It also adjusts its weights as people switch between products when prices change. Since 2000, PCE inflation has run on average about 0.4 percentage points below CPI (see the chart).
- Core PCE is PCE without food and energy (BEA).
CPI vs PCE at a glance
| CPI | PCE | |
|---|---|---|
| Published by | Bureau of Labor Statistics, monthly | Bureau of Economic Analysis, monthly |
| Whose spending | Out-of-pocket spending by urban households | Spending by and on behalf of all households, including employer health insurance, Medicare and Medicaid |
| Where the weights come from | Surveys of households, updated once a year | Data from businesses, updated every month |
| When prices change | Uses a basket that is fixed for a year, so it is slow to notice people switching to cheaper goods | Shifts its weights as people switch (steak to hamburger), so it catches substitution quickly |
| Housing’s share | About 33% | About 16% |
| Health care’s share | Smaller: only what people pay themselves | Larger: includes what insurers and government pay |
| The Fed’s 2% target | No | Yes, since 2012 |
| Typical reading | About 0.4 points higher on average since 2000 | Usually the lower of the two |
Sources: BEA, Cleveland Fed, St. Louis Fed.
Why juggle four numbers? Because the Federal Reserve’s 2% inflation target is defined using PCE, not CPI (Federal Reserve). The core versions help it look through temporary shocks. When investors try to guess the Fed’s next move, PCE and core PCE are the numbers that count.
Four ways to measure inflation
Change over the past 12 months. The Fed aims for 2% on PCE.
Data as of 2026-08-01 · Source: FRED (BLS, BEA)Two things stand out in the chart. In 2022, headline CPI peaked at about 9% in June, while core CPI peaked lower and later, at about 6.6% in September: surging food and energy prices were doing much of the damage. And in 2026, the oil shock pushed headline CPI back up to about 3.4% while core CPI stayed near 2.5%. When headline and core pull apart, energy is usually the reason.
Jobs: the unemployment rate
Section titled “Jobs: the unemployment rate”The unemployment rate is the share of people who want a job and are actively looking for one but don’t have one. It’s published monthly by the BLS.
Unemployment is the most human of the three numbers, and it moves in a telling way: it tends to rise fast in recessions and fall slowly in recoveries. Companies fire quickly when demand collapses, but hire cautiously when it returns.
Leading, coincident and lagging indicators
Section titled “Leading, coincident and lagging indicators”Not every number tells you about the same moment. Economists sort indicators by when they turn, compared with the economy as a whole (Business Conditions Digest):
- Leading indicators turn before the economy does. They hint at where it is heading.
- Coincident indicators turn at the same time. They tell you where it is now.
- Lagging indicators turn after. They confirm what has already happened.
The Conference Board, a business research group, publishes an index of each type for the US (leading and coincident; lagging). Here is what goes into them:
| What it tells you | Examples | How investors use it | |
|---|---|---|---|
| Leading | Where the economy is heading | Stock prices, building permits, new factory orders, weekly jobless claims, the gap between long- and short-term interest rates | Early warning of a turn. Markets price the future, so these matter most for trading. |
| Coincident | Where the economy is now | Payroll jobs, industrial production, personal income, manufacturing and trade sales | Confirming whether the economy is expanding or shrinking right now |
| Lagging | Where the economy has been | How long people stay unemployed, services inflation, the interest rate banks charge, business loans outstanding | Confirming that a turn really happened. Too slow to trade on, but central banks watch some of them closely. |
Here is one example of each, with recessions shaded.
Leading: the yield curve (10-year minus 3-month Treasury rate)
Below zero means short-term rates are above long-term rates: an 'inverted' yield curve.
Data as of 2026-09-01 · Source: FRED (Federal Reserve, NBER)When short-term interest rates rise above long-term ones, the yield curve is said to be inverted. It inverted 9 to 17 months before each of the four US recessions since 1985 (see the chart), which is why the New York Fed uses it to estimate the chance of a recession a year ahead (New York Fed). But no indicator is perfect. The curve stayed inverted from late 2022 to mid-2025, the longest stretch in this data, and as of August 2026 no recession had followed.
Coincident: payroll jobs, change over a year
Data as of 2026-09-01 · Source: FRED (BLS, NBER)The number of jobs moves with the economy. In every recession in the chart, job growth turned negative during the shaded band itself.
Lagging: how long people stay unemployed
Average number of weeks that unemployed people have been out of work.
Data as of 2026-09-01 · Source: FRED (BLS, NBER)This one peaks long after each recession ends: in 1994, 2004, 2011 and 2021, between one and three years after the shaded bands (see the chart). People who lose their jobs in a recession can take years to find new ones, even once the economy is growing again.
Try it
Section titled “Try it”Here is real US data for all three measures, with recessions shaded. Growth and inflation are shown as the change over the previous 12 months.
Growth, inflation and jobs
Data as of 2026-04-01 · Source: FRED (BEA, BLS, NBER)Things to look for:
- Turn on unemployment and look at each shaded band. What does unemployment do during every recession, and how quickly does it come back down afterwards?
- Switch to “All” and find the 1970s and early 1980s. How does inflation back then compare with 2022?
- Look at growth around each recession. Does GDP growth always turn negative, and does it recover faster or slower than unemployment?
Real-world example: the 2020 COVID recession
Section titled “Real-world example: the 2020 COVID recession”The COVID shock is the business cycle compressed into a few months, and it shows all three numbers moving at once.
- Growth. As the economy shut down in spring 2020, real GDP in the second quarter was about 7% lower than a year earlier (see the chart). It’s one of the sharpest drops in the data.
- Unemployment. The unemployment rate jumped from 3.5% in February 2020 to 14.8% in April, the highest in the chart’s history. Then it fell faster than in any previous recovery, as businesses reopened.
- Inflation. At first, inflation fell, because nobody was spending. Then, as the economy reopened with supply chains still broken and government support flowing, inflation climbed to about 9% by mid-2022.
- Official dates. The NBER dated the recession from February to April 2020: two months, the shortest US recession on record (NBER).
The lesson for investors: each number told a different part of the story at a different time. Growth and jobs collapsed first; inflation turned up much later, and that delayed inflation drove markets in 2022.
Key takeaways
Section titled “Key takeaways”- Real GDP growth tells you whether the economy is producing more; nominal figures include price rises.
- Inflation (usually measured by CPI) is how fast prices are rising. Central banks target about 2%, and fight it with higher interest rates when it runs hot.
- Unemployment rises fast in recessions and falls slowly in recoveries.
- Leading indicators (like the yield curve) turn before the economy, coincident ones (like payroll jobs) move with it, and lagging ones (like how long people stay unemployed) turn after it.