What Are Leading Economic Indicators?
Definition & Examples of Leading Economic Indicators
Leading economic indicators are statistics that provide insights into economic health, business cycle stages, and the status of consumers within an economy. They lead, or appear before, broader changes in the economy and indicate what economic changes will be happening soon.
Learn what statistics are considered leading economic indicators and how to use these in your financial and investing decisions.
What Are Leading Economic Indicators?
Economic indicators are statistics released by governments, non-profit organizations, and private companies that communicate 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.
In general, investors pay the most attention to leading economic indicators, since they can help predict where prices may be headed.
Some examples of leading economic indicators include:
- Unemployment claims
- Building permits
- Inventory changes
- Stock prices
Changes in these numbers can indicate what shortr-term, near-future changes are likely to occur in the broader economy.
How Leading Economic Indicators Work
Leading economic indicators show potential signs of change before economies show any material changes in their corresponding lagging indicators.
For example, when unemployment claims increase, it takes several weeks for that change to be reflected in the unemployment rate. Therefore, unemployment claims are the leading indicator and the unemployment rate is the lagging indicator.
Leading economic indicators can signal major changes in the economy. If these indicators fail to meet expectations, this generally signals a signal a bearish trend in the economy, while 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 implement easing policies if leading indicators suggest that the economy is faltering. The opposite may be true if leading indicators suggest that the economy is strengthening.
Investors may respond by selling equities when interest rates are on the rise or buying equities when interest rates start to fall.
Do I Need to Know Leading Economic Indicators?
Understanding and monitoring leading economic indicators can help you make smart investing and financial decisions.
These indicators can indicate the direction of both the broader economy and of specific sectors. For example:
- 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 use that opportunity to purchase valuable stocks at a lower price.
Specific leading indicators can be good and bad for different investments, too. For example, gold may react positively to poor economic data (when it's used as a safe-haven), while payroll stocks may be particularly sensitive to leading indicators that suggest companies aren't hiring as much.
How you use leading economic indicators will depend on your financial goals and the type of investments you have. Understanding them, however, can benefit any investor or consumer.
If you want to monitor a variety of leading economic indicators, you can find advance reports on a variety of economic 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, including:
- 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, which includes supplier deliveries, imports, production, inventories, new orders, new export orders, order backlogs, prices, and employment
- The S&P 500 index
- Measures of consumer expectations
These indicators can either 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 American 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 making predictive investing decisions.