Economic Indicators Are Your Secret Weapon

Girl Pulling Piggy Bank on Bike
••• Colin Anderson

Want to know if house prices are going to rise? Need to understand if recent economic/political measures are paying off for the country? Having an understanding of this information can prove profitable for you, and may even help you get a few good deals while avoiding costly mistakes.

Economic indicators reveal all of this and more. Most of this data is tracked and publicly available, so why not use it to your advantage? Considering that the vast majority of investors never look into this information, you would be giving yourself a leg up on almost all the other players in the markets.

Economic Indicators demonstrate the health and direction of the economy. For example, the employment report reveals the size of the nation's workforce, the types of careers people have, and even how many people are actively looking for work. Also consider that by comparing the results to previous periods, you can illustrate if those numbers are getting stronger or weaker.

By tracking or analyzing various aspects of data, such as the employment rate, the current situation can be better understood, and the future economic outlook can be anticipated. There are plenty of opportunities which come from paying attention to the data.

Perhaps it is a better time to start a business when incomes are rising. Maybe job-searches will be more fruitful when most people are employed. For investors, strong corporate growth bodes well for stock markets. 

The information which the various indicators display have far-reaching implications for businesses, employees, and the economy as a whole.

There are three types of indicators you need to know, and which will tell the story of many aspects of the nation. These are leading, lagging, and coincident indicators.

Leading Indicators

Leading Indicators are data points which tell you what will probably happen in the coming months and years. For example, if the "U.S. economic activity" data increases, it suggests that the economy is getting more active, and by extension stronger.

Some examples of leading indicators, which can demonstrate where the economy is heading, include but are not limited to:

  • Manufacturing activity
  • Retail sales
  • Inventory levels
  • House prices
  • Building permits

Lagging Indicators

Lagging Indicators are measures of economic data which eventually improve or get worse in response to the overall economic direction, albeit months after the fact. For example, in a recession, you will typically see incomes and wages decline.

Some examples of lagging indicators, which demonstrate how the economy has responded to its situation, include:

  • Gross Domestic Product (GDP)
  • Incomes, wages, salaries
  • Household debt levels
  • Inflation
  • Unemployment 
  • Trade balances
  • Interest rates
  • Corporate profits

Coincident Indicators

These are measurable points of data which change in close relation to the economy. For example, hours worked will change pretty quickly with spikes or collapses in economic health.

Some examples of coincident indicators, which demonstrate strength or weakness in line with actual economic strength and weakness, include:

  • Producer prices
  • Industrial production
  • Average hours worked
  • Consumer price inflation

By watching all of these indicators, you will get a view into the health of the economy. By paying extra attention to the leading data, you will benefit by knowing where stocks, the job market, and house prices are headed. While not an exact science, there are many advantages and opportunities to know where various aspects of the nation are heading.