Leading economic indicators are statistics that give 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. They indicate what economic changes will be happening soon.
Learn what statistics are considered leading economic indicators and how to use these in your financial decisions.
What Are 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.
In most cases, you'll want to pay the most attention to leading economic indicators. That's because they can help predict where prices may be headed.
Some types of leading indicators include:
- Unemployment claims
- 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.
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; the unemployment rate is the lagging one.
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.
Do You Need to Know Leading Economic Indicators?
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. For instance:
- 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.
What Are the 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; this 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.
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. 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 making predictive investing decisions.