Important Economic Indicators For Analysts

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What Are Economic Indicators?

Economic indicators are data sets that help analysts and investors understand what has happened in the past or what might happen in some segment of the economy in the future.

These economic indicators can be further categorized into 2 categories: leading and lagging

Leading indicators are a set of statistics about economic activities that help in macroeconomic forecasts of the economy and emerging stages of business cycles (peak, contraction, trough, expansion).

It provides early signs of turning points in business cycles that precede coincident and lagging indicators.

Lagging economic indicators are statistics that follow an economic event. We use them to confirm what has happened in the economy in the past. This allows us to establish a trend and identify turning points of the business cycles (peak, contraction, trough, expansion).

An example of a trend from lagging indicators is that as the economy heads toward a peak, unemployment becomes less of an issue but inflationary pressure might build up as the economy reaches full employment.

Another example is that labor force participation will decline as the economy slows down (contraction) and inflationary pressure will be lower and deflation might become a concern.

Important Leading Economic Indicators

There are 5 important leading economic indicators that many analysts and investors are interested.

  1. Yield Curve:

This indicator uses data from short term and long term interest rates on Treasury Bills (T-Bills), Bonds, and Notes to predict impeding recessions with remarkable accuracy.

When the yield curve of the 2 year treasury bonds and the 10 year treasury bonds inverts, the chance of a recession occurring within the next 12 months jumps to 68% and 98% within the next 24 months.

2. Building Permits:

This data predicts how new home construction will look like in the future. Cities will issue permits after the purchaser has signed a contract, in which the home will be built within the next few months.

3. Manufacturer Jobs:

If manufacturing companies stop hiring, this means that the probability of a recession is extremely high.

However, if manufacturing companies begin hiring and expand, this is an indicator of expansion in the business cycle.

4. Stock Market

This is a good predictor for investors and analysts because it is a reflection of expected future earnings of companies.

5. Business Durable Good Orders

If a business is ordering durable goods (machines, equipment), this is a good indicator that businesses are expanding and growing, which indicates the economy is in the expansion point in the business cycle.

Lagging Economic Indicators

There are 5 important lagging economic indicators as well.

  1. GDP (Gross Domestic Product)

This is the total dollar value of all final goods and services produced within a country.

We can measure GDP by adding the sum of consumption(C), investment(I), government expenditures(G), and net exports(NX).

(C+I+G+NX)

It is also important to note that consumption accounts for 70% of the GDP.

GDP allows us to get a snapshot of the economy and how much is being produced.

According to NBER, a recession is defined as two consecutive quarters of negative GDP growth.

2. Consumer Price Index (CPI)

The CPI is the most widely reported accounting of inflation. So, essentially, this index tells us the inflation rate of the economy.

If inflation is high, consumers will spend less on the economy overall, reducing economic growth.

As a general rule through trend analysis, as we reach the top of the business cycle (peak), unemployment will be low but inflationary pressure will be higher. As we know, the next business cycle preceding a peak, is contraction.

3. Unemployment Rate

Unemployment rate is a lagging indicator because it will start to increase as the economy begins to decline.

The amount of jobs lossed or gained can tell economists what to expect in the future.

4. Consumer Confidence Index (CCI)

This consumer confidence indicator provides an indication of future developments of households’ consumption and saving, based upon answers regarding their expected financial situation, their sentiment about the general economic situation, unemployment and capability of savings.

An indicator above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to spend money in the next 12 months.

Values below 100 indicate a pessimistic attitude towards future developments in the economy, possibly resulting in a tendency to save more and consume less.

5. Interest Rates

The Federal Reserve uses interest rates as a lever to expand the economy or slow it down.

If the economy is slowing, the Federal Reserve will lower interest rates to make it cheaper for businesses to borrow money, invest, and create jobs. This also allows consumers to borrow and spend more, which helps grow the economy.

If the economy is growing too fast and inflation is increasing, the Federal Reserve may raise interest rates to slow down consumer and business spending and borrowing.