What are leading economic indicators?

Definition and Examples of Leading Economic Indicators

How do leading economic indicators work?

Do I need to know them?

Types of Leading Economic Indicators

Definition and Examples of Leading Economic Indicators

Economic indicators are statistics that provide insight into economic health and the stages of the business cycle and consumer conditions within the economy. Economic indicators point to changes in the economy and are classified as leading and lagging indicators based on their timing. Leading economic indicators are those that change before any signs of economic change appear. Investors use leading indicators to help forecast economic trends and make predictive investment decisions.

How do leading economic indicators work?

Leading economic indicators show signs of change before any concrete change appears in the corresponding lagging indicators. For example, when unemployment claims rise, it takes a few weeks for this change to appear in the unemployment rate. This means that unemployment claims are the leading indicator, while the unemployment rate is a lagging indicator. Leading economic indicators can signal significant changes. If these indicators fail to meet expectations, there may be a downward trend in the economy. Indicators that exceed estimates can point to an expected upward movement.

Leading indicators are also used by central banks to make monetary policy decisions. For example, a central bank may decide to lower interest rates or adopt easing policies if the indicators suggest an economic downturn. The opposite may be true if the indicators suggest an economy that is strengthening.

Some investors may respond by selling stocks when interest rates rise, or they may buy when prices start to fall.

What do leading economic indicators mean for investors?

Understanding leading economic indicators can help you make smart financial decisions. These indicators can show the overall direction of the economy and sub-sectors. For instance, a slowdown in manufacturing output may indicate a decline in retail sales as merchants reduce inventory. A drop in retail sales can lead to lower revenues in the retail sector. When this happens, investors may sell retail stocks and other discretionary consumer stocks. Depending on your financial goals, you may want to sell before the economy declines or wait for the decline to happen and then buy valuable stocks at lower prices.

Some leading indicators can be good or bad for different investments. For example, gold may react positively to poor economic data when used as a safe haven.

How to use leading indicators will depend on your financial goals and the types of investments you own. Understanding them can be beneficial.

If you wish to monitor a variety of leading economic indicators, you can find advanced reports compiled by the U.S. Census Bureau.

Types of Leading Economic Indicators

Important leading economic indicators include:

• Monthly unemployment rate and average wages
• Initial unemployment claims for state unemployment insurance
• Consumer goods and materials spending including manufacturer shipments, inventories, and orders
• Non-defense capital goods spending including manufacturer shipments, inventories, and orders
• Building permits and new privately-owned housing
• The difference between the 10-year Treasury bond yields and the federal funds rate
• The central bank’s measure of the money supply M2 adjusted for inflation
• ISM Manufacturing Index, including supplier deliveries, imports, production, inventories, new orders, new export orders, unfilled orders, prices, and employment
• S&P 500 index
• Consumer sentiment indicators

The Conference Board is a nonprofit organization that has created a leading economic index in the United States called the Leading Economic Index (LEI) of the Conference Board. It includes all of these indicators.

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Using these indicators individually to monitor specific sectors in the American economy, or they can be taken together to get a picture of the broader American economy.

International investors can find the same types of composite leading economic indicators in many other countries around the world or compile this information from individual economic indicators available from nonprofit organizations and governments.

Source: https://www.thebalancemoney.com/what-are-leading-economic-indicators-1978977