The number one most used indicator for the economy is Gross Domestic Product, or GDP. GDP measures the output of all goods and services in an economy. Even if a hammer or a computer was made, but never sold and sat on a storeroom shelf, it is still included in GDP. GDP is used to determine if an economy is growing or shrinking—economies go through long cycles of expansion and recession, and the best way to tell where we have been in that cycle is with GDP.
Oftentimes it is listed as GDP per capita (output per person) or as a growth percentage. Sometimes it is listed in nominal or real (or chained) dollars. Suppose a company says it sold $11 worth of gloves, 10% more gloves than last quarters’ $10 sold. It is unclear whether they actually sold more gloves this quarter, or simply raised prices 10%. If they simply raised prices, the true volume of gloves sold is no more than last quarter, or $10. In this case, the glove factory’s nominal GDP would be $11, and its real or chained GDP would be $10, because real GDP takes out the effect of rising prices.
GDP is a backward-looking indicator because it tells us what the economy has done, but it is limited in its ability to tell us how the economy will do in the future. It is also limited because it is not very timely—GDP in the U.S. is only released on a quarterly basis, one month after the quarter has ended. After it is released, it is revised one month later, and then annually at the end of July. These revisions almost always change the first number, making GDP at best a rough gauge of how the economy is doing.