You can get an understanding of the economy and its direction by using economic indicators. Basic economic indicators help you understand the current market flow, and anticipate the likely nature of future flow. Wise investors use economic statistics to help determine the best times to buy and sell securities, or to identify other financial variables of importance to decision making.
The Leading Economic Indicators
You can categorize economic indicators or divide them into groups. The economic indicators calendar has strict release dates. Because of this, investors can anticipate seeing specific information at certain times of the month and year.
If you consider working with a financial advisor, let the expert take into account these leading economic indicators:
Leading indicators, such as net business formations, consumer durables, the yield curve, and share prices, are used to predict future economic trends. However, you should take this information with a grain of salt because it could not be accurate.
The numbers or data on these indicators fluctuate well before seeing economic growth. Investors are interested in leading indicators that correctly predict the future.
These investors monitor yield curves to gain insight into interest rates and how they might influence the future performance of bonds or stocks. Other investors think that securities will perform the same way they did the last time the yield curve was in a particular shape.
Coincident indicators are observed coupled with the onset of specific economic activities, including employment levels, retail sales, and gross domestic product or GDP.
This real-time data offers insight into what is going on to make informed decisions. These indicators allow policymakers to leverage real data without delay.
You see lagging indicators such as the gross national product (GNP), consumer price index (CPI), unemployment rates and interest rates after a specific economic activity.
- The number of jobs created or lost in a month is a good indication of the state of the economy and has a significant effect on the stock market.
- CPI tracks shifts in the prices of goods and services for urban consumers in a specified month. It’s how CPI measures changes in the cost of living to gauge inflation.
- PPI is a coincident indicator that screens price changes across almost all industries that produce goods, including farming, manufacturing, mining, forestry, and fishing.
- Interest rates are a lagging indicator of economic growth. Economic and market developments affect the federal funds rate by making it higher or lower. Borrowers are less inclined to take out loans when interest rates rise. This rise turns consumers away and prevents them from going into debt and businesses from maturing, which would cause GDP growth to stagnate.
Inflation is a lagging indicator of rising prices, but you see the results only after the spike. This type of economic indicator helps the government set public policies. Without this information, government agencies wouldn’t know where the economy is heading. Even though inflation and other lagging indicators are valuable, they are more beneficial for future policy reforms.
But the problem with lagging indicators is that the numbers could be wrong as they become quickly outdated. As a result of expired numbers, they take a high risk. Surprisingly, many governments and institutions still use the data, although the response may be too late.