Definition and Examples of Leading Economic Indicators
Economic indicators are statistics released by governments, non-profit organizations, and private companies that share information about the economy.
These indicators can be broadly classified based on their timing:
- Leading indicators provide an idea of what economic conditions are coming in the near future.
- Lagging indicators show what happened in the recent past.
Typically, investors and economists pay attention to leading economic indicators since they can help predict or forecast economic growth, corporate earnings, and stock prices.
Some types of leading indicators include:
- Unemployment claims
- Consumer confidence
- Building permits
- Inventory changes
- Stock prices
Changes in these numbers can show what short-term, near-future changes are likely to occur in the broader economy. For example, the Consumer Confidence Index (CCI) is based on the Consumer Confidence Survey by the Conference Board, which reflects business conditions and potential future developments.
The report highlights consumer attitudes, spending intentions, and expectations for stock prices, inflation, and interest rates. The Consumer Confidence Index decreased in April 2022 to 107.3 (1985=100), which was down from over 120 in 2021. However, over 55% of consumers said that jobs (the labor market) were plentiful.
How Do Leading Economic Indicators Work?
Leading economic indicators show signs of change before economies show any material changes in their corresponding lagging indicators.
For instance, when unemployment claims increase, it takes a few weeks for that change to show up in the unemployment rate. That means unemployment claims are the leading indicator while the unemployment rate is a lagging indicator.
Leading economic indicators can signal major changes. If these indicators fail to meet expectations, this may signal a bearish trend in the economy. Indicators that surpass their estimates can signal a bullish move ahead.
Leading indicators are also used by central banks in order to make monetary policy decisions. For instance, a central bank may opt to lower interest rates or create easing policies if indicators suggest that the economy is faltering. The opposite may be true if the indicators suggest that the economy is getting stronger.
Some investors may respond by selling equities when interest rates are on the rise; or, they may buy when rates start to fall.
What Leading Economic Indicators Mean for Investors
Understanding leading economic indicators can help you make smart financial decisions. These indicators can show the direction of both the broader economy and of specific sectors:
- A slowdown in manufacturing output could signal a coming drop in retail sales as retailers stock fewer items.
- The drop in retail sales could result in lower revenues across the retail sector.
- This could cause a slowdown in a primarily service-based economy.
When this happens, investors may sell retailer stocks and other consumer discretionary equities. Depending on your financial goals, you may want to sell ahead of the drop in the economy. Or, you may want to wait for the drop; then, you might purchase valuable stocks at a lower price.
Certain leading indicators can be good and bad for different investments, too. For instance, gold may react positively to poor economic data when it's used as a safe haven. But payroll stocks may be more sensitive to leading indicators that suggest companies aren't hiring as much.
How you use leading indicators will depend on your financial goals and the type of investments you have. But understanding them can be a good idea for anyone.
If you want to keep an eye on a variety of leading economic indicators, you can find advance reports on a variety of indicators compiled by the U.S. Census Bureau.
Types of Leading Economic Indicators
The components of the index include a variety of important leading economic indicators. They include:
- The monthly unemployment rate and average earnings
- Initial claims for state unemployment insurance
- Consumer goods and materials spending, including manufacturer shipments, inventories, and orders
- Spending on non-defense capital goods, which includes manufacturer shipments, inventories, and orders
- Building permits and new private housing
- The spread between 10-year Treasury Bill interest rates and the federal funds rate
- The central bank's inflation-adjusted measure of the M2 money supply
- The ISM manufacturing index, including supplier deliveries, imports, production, inventories, new orders, new export orders, order backlogs, prices, and employment
- The S&P 500 index
- Measures of consumer expectations
The Conference Board is a non-governmental organization that has created a leading economic index in the U.S.; it's called the Conference Board Leading Economic Index, and it includes all these economic indicators.
These indicators can be used individually to monitor specific sectors of the U.S. economy, or they can be taken together to give a picture of the broader U.S. economy.
International investors can find these same types of aggregate leading economic indicators in many other countries around the world or compile this information from individual economic indicators that are available from nonprofit and government organizations.
- Economic indicators are statistics that indicate changes in the economy. They are classified as leading or lagging based on their timing.
- Leading economic indicators are those that change before economies show any signs of change.
- Leading indicators are used by investors to help predict the direction of economies and make predictive investing decisions.