Understanding the Significance of Key Economic Indicators for Investors
Macroeconomic indicators and trends play an important role in shaping financial market performance. Developing a deeper understanding of these indicators helps investors interpret shifting conditions and adjust portfolio positioning in an evolving investment landscape.
Below are several key economic indicators that provide insight into the state and direction of the economy.
Gross domestic product (GDP)
GDP measures the total value of goods and services produced within a country over a given period. The rate of GDP growth indicates how quickly an economy is expanding or contracting. Strong GDP growth generally signals an expanding economy and is often associated with rising employment, improving productivity and stronger demand, conditions that can contribute to higher prices. GDP can be measured in several ways:
- Expenditure approach: Calculates GDP as the sum of consumer spending, government spending, business investment, and net exports (exports minus imports).
- Income approach: Measures GDP as the sum of national income, sales tax, and depreciation, minus net foreign factor income (known as NFFI, which reflects the difference between income earned by domestic entities abroad and income earned by foreign entities domestically).
- Production approach: Calculates GDP as the sum of value added at each stage of the production process.
Unemployment rate
The unemployment rate measures the percentage of the labour force that is willing and able to work but is currently without employment. Elevated unemployment typically signals weak demand and a slowing economy and is often associated with more accommodative monetary policy.
Inflation
Inflation refers to a broad and sustained increase in overall price levels over time. Elevated inflation can signal an overheating economy, where demand exceeds supply and cost pressures are rising. Common measures of inflation include:
- Headline inflation: measures price changes across a broad basket of goods and services. Widely used indicators include the Consumer Price Index (CPI) and Producer Price Index (PPI).
- Core inflation: excludes more volatile components, such as food and energy, to provide a clearer view of underlying inflation trends. Common measures include core CPI and core Personal Consumption Expenditures (PCE) inflation.
- Inflation expectations: reflect expectations for future inflation and are derived from surveys, market-based indicators and model-based estimates.
Interest rates
Interest rates represent the cost of borrowing and are closely tied to central bank policy decisions. Higher interest rates signal tighter monetary and financial conditions and typically lead to slower borrowing activity, reduced spending and restrained economic activity.
Consumer indicators
Measures such as consumer confidence, retail sales and household sentiment provide insight into consumers’ financial health and their willingness to spend – an essential driver of overall economic growth.
Business indicators
Business sentiment and activity indicators – such as manufacturing output, capital expenditure, and survey-based confidence measures – provide insight into corporate expansion plans, credit fundamentals, and expectations future economic conditions.
Understanding whether indicators tend to lead or lag economic cycles helps investors assess where the economy may be heading. Leading indicators, such as inflation expectations and consumer sentiment are forward-looking and often move ahead of broader economic activity. By contrast, lagging indicators, such as the unemployment rate and realised inflation, typically reflect changes that have already occurred in the economy.
How business cycles shape investment performance
GDP growth and the unemployment rate are two of the primary indicators used to assess the business cycle, which describes fluctuations in economic activity over time. Business cycles are commonly characterized as periods of expansion and contraction, with peaks and troughs marking turning points in economic momentum.
- Expansionary phase: Characterized by rising employment, increasing consumer spending, and accelerating GDP growth, often accompanied by rising inflation.
- Contractionary phase: Marked by slowing economic activity, declining GDP growth, weakening consumer confidence, and rising unemployment, eventually leading to an economic trough.
Excess returns across the business cycle
Source: PIMCO, FRED, Bloomberg, NBER US Business Cycles as of 31 December 2025. For illustrative purposes only. Past performance is not a guarantee or a reliable indicator of future results.
Calculations for excess returns over the cash rate for equities (represented by S&P 500 Index) and bonds (represented by FRED US 7-10 Year Treasury series) based on monthly data from May 1953. Calculations for Commodities (represented by Composite Commodity Index of widely followed indices) and HY (represented by Bloomberg U.S. Corporate High Yield Index) are based on monthly data from July 1959 and August 1988, respectively. Equity, bonds and commodities are in excess of the risk-free rate (represented by 3-month Treasury Bill). HY is duration neutral, thus we do not subtract the risk-free rate. Estimates assume the current stage to be an expansion as of 31 December 2025. Recessions and expansions are defined by NBER.
The figure above illustrates how excess returns across asset classes have historically varied over the business cycle. Equities have typically performed better during expansionary periods, when economic growth and corporate earnings are robust. Bond performance is more nuanced and tends to be particularly sensitive to changes in interest rates, inflation, and policy expectations.
During expansionary phases of the business cycle, central banks may raise interest rates to contain inflationary pressures, putting downward pressure on bond prices. Conversely, during contractionary phases, interest rate cuts have historically supported bond performance as yields decline. Core bonds have historically outperformed during the early stages of a recession, while the later stages, when markets begin to anticipate recovery, have often favoured higher-yielding segments of the bond market.
Aligning exposures with economic views
Investors can take practical steps to navigate business cycles more effectively. The illustration below highlights how different segments of the bond market may be emphasised at various stages of the cycle.
Common decision-making for economic expectations
At the same time, avoiding behavioural biases – such as selling during market declines or chasing performance during upturns – can help investors prevent decisions that undermine long-term investment outcomes. Maintaining a well-diversified portfolio across asset classes, and within fixed income, may help reduce volatility and improve resilience across changing economic environments.
