Economic Conditions

What are Economic Conditions?

Economic conditions are the present state of affairs in the overall economy of a country or geographical region. The conditions evolve over time through various business and economic cycles.

Economies cycle through periods of contraction or expansion – the former referring to an economy that is weakening, and the latter referring to an economy that is strengthening.

Understanding Economic Conditions

Economic conditions refer to the state of an economy that determine the scale of production and consumption activities that relate to determining how resources are allocated.

In the modern world, almost all economies are based on market-based economic principles, where the laws of supply and demand determine prices.

The economy is affected by supply and demand, but there are forces that can influence the economic landscape. Some factors and variables include monetary and fiscal policy, global economic conditions, unemployment levels, trade balances, productivity, exchange rates, inflation, and interest.

Economic conditions are monitored by many stakeholders, including government entities, corporations, individuals, investors, etc. Various government entities systematically release the economic data on either a weekly, monthly, quarterly, or annual basis. The economic data comes in the form of lagging and leading indicators.

Lagging Indicators

A lagging indicator is an observable economic variable where its direction and movement change significantly after a change’s been observed in the economy.

Lagging indicators are used to gauge which stage of the business or economic cycle the economy is in, as well as gain insights on the trend of the economy.

Examples of lagging economic indicators are:

• Balance of Trade
• Consumer Price Index (CPI)
• Corporate Earnings
• Gross Domestic Product (GDP)
• Interest Rates
• Unemployment Rate

Leading Indicators

A leading indicator is an observable economic variable where its direction and movement change significantly before a change’s been observed in the economy.

Leading indicators are used to forecast when a change in the economic cycle is going to occur. They are also used to understand what may happen in the near future – three to six months, for example.

Leading indicators are not always accurate in determining which stage of an economic cycle an economy is in; nonetheless, government entities, corporations, and individuals all use the indicators to plan their strategies and operations.

Examples of leading economic indicators are:

• Consumer Confidence Index
• Corporate Capital Expenditures
• Housing Starts
• Jobless Claims
• Retail Sales
• Stock Market
• Yield Curve

Importance of Economic Conditions

The economic cycle, or business cycle, can be determined by monitoring the trend of upward and downward movements of Gross Domestic Product (GDP).

Virtually everyone is a participant in the market economy. Everyone plays a role in either consuming or producing goods and services.

The success of the market-based economy depends on the fact that it makes everyone better off by producing and consuming more goods and services over time. It is measured by GDP, which provides a rough depiction of the overall wealth of an economy.

As everyone participates in the overall economy, it reasonably follows that everyone is somehow impacted by economic conditions. It is in the best interest for the economy to continuously expand and for everyone to continue accumulating more wealth.

When economic conditions are strong and the economy is in a period of economic expansion, generally speaking, everyone is better off. Businesses generate profits and hire more employees, which leads to more disposable income that is spent to generate more profits in a virtuous cycle.

However, when economic conditions are weak and the economy is in a period of economic contraction, generally speaking, everyone ends up being worse off. Businesses begin losing money and laying off employees, which leads to less disposable income and less consumer spending, resulting in less income for businesses in a vicious cycle.

Related Readings

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Gross Domestic Product (GDP)
• Business Cycle
• Economic Indicators
• Consumer Price Index (CPI)
• See all economics resources