Macro vs. Microeconomic Indicators
Economic indicators are tools that enable economists and business owners to predict, with varying degrees of accuracy, changes in the economy. If you can correctly predict changes in the economy, you can plan more effectively, and you may even be able to position yourself to profit from an economic downturn. Both macroeconomic and microeconomic indicators are essential tools, and you should familiarize yourself with their use.
Macroeconomics refers to the big picture, or overhead view, of economics. When you study macroeconomics, you look at things like geopolitical factors, industrial factors and overall supply and demand. At the country level, you would be looking at Gross Domestic Product, unemployment rates, and overall growth rate. The interplay between these factors is also extremely important.
As you might guess, the study of macroeconomic indicators is far from simple. Yet it is crucial at the government level because policy informs regulation and regulation has a direct impact on the economy. For a simple example of this, consider how interest rates in the U.S. affect the economic outlook. In the U.S., for instance, the government sets a base interest rate. Banks use this rate to determine how they conduct business.
For instance, As interest rates rise, interest on loans becomes more profitable, and banks are more likely to give out more loans overall. On the other hand, higher interest rates mean that savers, too, make more money. Additionally, higher rates mean that inflation will go down over time because consumers are saving more money.
If interest rates go down, you can expect to see the opposite. The interest rate is only one macroeconomic indicator. As you can see, the interplay between these indicators becomes very complex. Consider how tariffs can impact trade between nations, and how currencies can gain or lose value, relative to one another, and you begin to see what a complex web macroeconomics is. Macroeconomic indicators are forever shifting, and thus, you should use them to get a wide-angle view of what may be coming down the pike.
Many business owners only think of the economy when it isn’t running so well. Economic downturns, especially downturns of the sudden variety, have been the cause of countless sleepless nights as entrepreneurs fret over their profit margins. Studying macroeconomic indicators can help alert you to potential economic downturns so you can prepare for them.
Imagine you’re about to open a high-end restaurant. The type with high prices and small plates. You do some basic macroeconomic research and find that unemployment is up along with consumer financial stress. You would be right to assume that this isn’t a great time to start a fancy restaurant after all. Under these circumstances, and given that most restaurant startups fail, you may be better off buying into a fast food chain.
Let’s take a look at a few key macroeconomic indicators:
• Housing starts. This is the number of new houses that begin construction within a specific time frame. If housing starts are down, this could indicate that consumers are not confident in the economy. Consumer sentiment is very important. You should never ignore it.
• Consumer financial stress. When consumers are burdened with debt or growing inflation, they are less likely to invest in big purchases, and are less likely to buy luxury items. High consumer financial stress indicates that consumers have less disposable income.
• Housing activity. If house sales go down, this could be an indicator of high consumer financial stress. If you suspect high consumer stress, but can’t find concrete examples, look at housing activity. On the other hand, high house sales indicate that consumers feel confident in the economy.
• Bankruptcy. When there are more bankruptcies, it’s very likely that the economy has headed south, and that the underlying factors contributing to the downturn have been in effect for some time.
Microeconomics refers to the more company-specific economic factors. This includes things like your specific industry or niche, changes in tax policy, price changes your competitors make, and the general supply and demand. These are the economic factors you will be most familiar with.
It is the relatively small economic decisions of microeconomics that, world-wide, all add up to the macroeconomic environment.
You will most often use microeconomic indicators to determine how to set your prices. Specifically, this is done through analysis of supply and demand. If there is an overabundance of a specific product, and constant demand, the price of that item will fall. If there is a shortage of supply, and constant or rising demand, the price will rise. This is because people presumably still need the product, and they will be willing to pay more for it than they usually would be. But if demand for a particular product falls because, for instance, a competitor has come out with a less expensive version, the price of that item must fall so that it can compete.
The relationship between supply and demand is the key focus of microeconomics. Everything you do when studying it should be viewed through that lens.
In summation, both aspects of the economy are closely related, though they each provide a unique viewpoint. Macroeconomic indicators are useful for making broad, long-term predictions, and microeconomic indicators are useful for gauging supply and demand, and thus they can be helpful for price setting.