Economies evolve over time, across various stages of a business cycle. To assess the health and direction of a country’s economy, policymakers, economists and investors use tools called “economic indicators.” Economic indicators are statistical data points that provide insight into how an economy is performing, so investors and governments can make informed financial decisions. They can either consist of a single data point or can be a composite of multiple data points that tend to move in the same direction.
Most economic indicators are official data releases, produced by governments or non-profit organizations. There are three main types of economic indicators: leading indicators, coincident indicators, and lagging indicators.
Leading Indicators
Leading indicators signal potential future changes in the economy – before it begins to shift in a particular direction. Policymakers, economists and investors integrate leading indicators into their decision-making processes, ensuring their choices align with projected economic conditions ahead.
Leading indicators include data points such as stock market indices, building permits and consumer confidence surveys.
- Stock Market Indices: The performance of stock markets can reflect investors’ expectations about economic growth. Rising stock prices can indicate optimism, while declines might signal uncertainty.
- Building Permits: An increase in building permits suggests a probable rise in construction activity, which can lead to economic growth through increased employment and spending.
- Consumer Confidence Surveys: This indicator measures consumer sentiment about the economy’s prospects. High confidence often leads to increased spending, while low confidence can lead to reduced consumer activity.
Coincident Indicators
Coincident indicators provide information about the current state of the economy and reflect ongoing economic activity. Coincident indicators are most often used to confirm current economic conditions and support the existence of a trend in the business cycle.
Coincident indicators include data points such as payroll employment, retail sales and the Industrial Production Index.
- Payroll Employment: The total number of paid full-time and part-time workers in both public and private sectors can tell us about the health of the job market and overall economic conditions. When companies are hiring, it signals to market participants that businesses are performing well. Increased incomes can also lead to higher consumer spending.
- Retail Sales: The total revenue generated by retail establishments can provide insight on consumer spending patterns, consumer confidence and economic demand. When sales are higher and consumers are spending more, companies in the retail sector of the stock market tend to perform better.
- Industrial Production Index: Encompassing manufacturing, mining, and utilities, this index reflects the collective output of crucial economic sectors. This indicator gives a comprehensive understanding of overall industrial activity and its impact on the economy.
Lagging Indicators
Lagging indicators are data points that confirm or validate trends that have already occurred. They provide a retrospective view of the economy and are used to assess the impact of previous events or policies.
Lagging indicators include data points such as Gross Domestic Product, the Consumer Price Index, and the change in labour costs.
- Gross Domestic Product (GDP): GDP measures the total value of all goods and services produced within a country during a specific period. Changes in GDP over time reveal trends and shifts in economic output, making it a key indicator of a nation’s overall economic health.
- Consumer Price Index (CPI): CPI tracks changes in the average price level of a basket of goods and services commonly purchased by households. It provides insights into inflationary pressures or deflationary pressures and helps gauge the impact of rising or falling prices on purchasing power, cost of living and wage growth.
- Change in Labour Costs: This indicator measures the changes in labour expenses, including wages, salaries, and benefits. This indicator provides insights into labour market conditions and cost pressures.
Remember, economic indicators are all interconnected, meaning changes in one indicator can affect the others. Therefore, economists and analysts look at multiple indicators to get a comprehensive understanding of the economy.
By understanding these indicators, investors can make more informed choices and better navigate the complex world of finance and economics.
