First things first, an economic indicator by definition is a statistic published by the government indicating a country’s economic condition. These indicators can influence the value of the nation’s currency, while also playing roles in the country’s fiscal and monetary policies.
Not all economic indicators are created equal, though. There are traditionally three different types of economic indicators. There are leading indicators, coincident indicators, and lagging indicators. Different statistics fall into these different categories depending on if they tend to be forward-looking, backward-looking, or looked at in real-time.
What are leading economic indicators?
Leading economic indicators are analyzed by economists to help forecast business cycles. These data points tend to “lead” the economy or move before the economy changes. While this list is not comprehensive, here are a few important leading economic indicators:
– Initial claims for unemployment
– New manufacturing orders
– New private housing units
– Stock prices
– Index of consumer expectations
Looking at these indicators, it makes sense why they would be considered “leading”. Statistics like these can indicate if the economy is expanding or contracting. With higher/lower initial unemployment claims, more or less people are out of work relying on unemployment for cash flow. If that number is really high, that isn’t a great sign for the economy moving forward. However, the effects of higher unemployment claims may not be felt in the true economy just yet, explaining why this is considered a leading economic indicator.
The same thing can be said for the stock market. It’s a common market adage that the stock market is forward-looking. Moves in the market are usually anticipating things to come either with specific companies, sectors, or the economy as a whole. When it’s said that things are “priced in” to the market, it means that the stock market has already moved in anticipation of events, or economic data, that haven’t happened yet.
Predicting market moves or shifts in the economy is very hard to get right, and even harder to get right on a consistent basis. These leading economic indicators can help give us a glimpse into what might be coming down the road, but ultimately nobody can predict the future.
Now that we’ve talked about leading indicators, let’s discuss the next type of economic indicator: coincident indicators.
What are coincident economic indicators?
These indicators move in tandem with the broad economy. They don’t tend to front-run any sort of moves in the economy like leading indicators would.
A few examples of coincident indicators are:
– Gross Domestic Product (GDP)
– Employees on non-agricultural payrolls
– Industrial production
– Personal income levels
Of these examples, industrial production tends to be an important indicator. The Industrial Production Index (IPI) is a statistic that gets published monthly and shows levels of production and capacity in areas like manufacturing, mining, electric, and gas industries.
Gross Domestic Product (GDP) tends to be the most popular economic indicator that we have. GDP measures the U.S. economy’s total production of goods and services. It measures the dollar value of all final goods and services newly produced within the country’s boundaries. GDP counts economic activity without regard to yearly price fluctuations. That can be measured by CPI which we’ll talk about a little later.
It can show how the economy is doing and can confirm or refute some of the leading statistics from the previous category. It’s always important to see how those leading economic indicators translate into the real economy to see if they’re truly sending any signs about what’s to come.
Let’s move on to the third type of indicator: lagging indicators.
What are lagging economic indicators?
Using context clues from the previous two, you can probably guess what lagging indicators are. Lagging indicators usually respond AFTER the economy has already begun to move. These indicators tend to be backward-looking or “confirming” indicators. Some of the more popular lagging indicators are:
– Consumer Price Index (CPI) and Producer Price Index (PPI)
– Average duration of unemployment
– Average prime rate charged by banks
– Change in the consumer price index for services
– Corporate profits
Lagging indicators aren’t used to predict trends or forecast shifts in the economy, they are used more to confirm those trends. Like we said before, nobody can predict the future so it’s important to utilize these lagging indicators to evaluate forecasts to see if they were accurate or not.
The Consumer Price Index (CPI) has been one of the most widely followed indicators over the last few years. It measures the rate of inflation. When it comes to the economy, there are few more important factors than the rate of inflation over the long-term.
One indicator that is loosely considered a lagging indicator would be interest rates in general. Interest rates tend to react to economic conditions and change, when necessary, in response to events happening in the economy.
So which of these economic indicators are the most important? Depending on who you ask, you might get different answers from everybody (like THIS or THIS). Since we broke down the three types of indicators, we’ll pick one from each category and leave you with three important indicators to keep an eye on.
Of the leading economic indicators, both stock prices and initial unemployment claims can both be rather useful pieces of information. (I know that was technically TWO indicators)
Moving onto the coincident indicators, you’d be hard pressed to find a more useful statistic than Gross Domestic Product. GDP does as good a job as it can at encapsulating the current state of the economy, and that’s essentially the definition of a coincident indicator.
Lastly, of the lagging indicators we discussed, the Consumer Price Index (CPI) would have to be the most important. The change in interest rates tend to work in tandem with CPI, so combining the two of those indicators can help give a decent snapshot of what economic conditions have looked like in the recent past.
Well, there you have it! Like we mentioned before, the indicators mentioned in this post are NOT the complete list of indicators out there. However, it’s important to have basic understanding of what these indicators are, what they mean, and what they can tell you about the economy and markets in general. If you have more questions about these indicators and how they can be best utilized, click the “Schedule a Consultation” button at the top of this page. We’d be happy to speak with you!
