Sooner or later, every investor is curious to know if economic indicators can provide clues for investing. That's why financial institutions have economists on staff and why the latest government reports on this economic indicator or that make headline news.
However, the economy is a bit like the weather: forecasters are always talking about it, but what actually happens is quite often a surprise. All the same, it helps to begin to figure out for yourself what indicators you should pay attention to and how concerned you really should be when the indicators are announced.
With that in mind, here's a brief introduction to some of the most widely watched economic indicators. The organizing principle here is whether they're providing information about the past, the present, or the future.
Lagging Indicators
The family of "lagging" or "trailing" indicators gets its name from the fact that they reflect economic conditions that have passed. Instead of predicting the future, they confirm what has already happened, so they tend not to cause sharp market reactions when they're announced - unless they diverge sharply from the consensus forecast of economics. Some of the major lagging indicators are:
- Consumer Price Index (CPI). This is the most-watched measure of inflation in America, measuring changes in the average price of a basket of consumer goods and services in the country's major metropolitan areas. Since 1945, the CPI has averaged just above 3% a year. Significantly higher rates are often associated with an economy that is growing too fast, which can lead to steps by the Federal Reserve to raise interest rates to curb borrowing and slow down the economy. Issuer: U.S. Bureau of Labor Statistics. Frequency: monthly; mid-month, covering the prior month.
- Unemployment rate. This measures the latest number of initial claims for unemployment insurance, as well as the number of people who are out of work as a percentage of the U.S. work force, defined as people who are already working or looking for work. This is considered a lagging indicator because unemployment continues to increase several months after the economy starts to improve. Issuer: U.S. Department of Labor. Frequency: weekly; Thursdays prior to market opening.
- Consumer credit report. This measures the dollar balances of consumer debt, including credit cards and bank loans, excluding loans backed by real estate. Since consumer spending accounts for 70% of the U.S. economy, rising levels of consumer credit reflect a strong economy, while declining levels indicate economic weakness. Issuer: Federal Reserve. Frequency: monthly; five weeks after month's end.
Coincident Indicators
Coincident indicators give a picture of the economy's current condition. These tend to cause more market volatility after their release than the lagging indicators. Some of the major coincident indicators are:
- Gross Domestic Product (GDP). This is the sum total of an economy's output of goods and services, measured in each nation's currency. The absolute number is less important than the change over time, expressed as a percentage. In the U.S., GDP growth has averaged between 3% and 4% annually since the end of World War II. Two consecutive quarters of negative growth is typically considered evidence of a recession. Issuer: U.S. Bureau of Economic Analysis. Frequency: quarterly; advance release three weeks after the end of each calendar quarter; final report released three months after the quarter ends.
- Retail sales report. This indicator is very closely watched by both economists and investors. It tracks changes in the dollar value of big- and small-ticket goods sold in retail stores, by mail order, over the Internet, and in vending machines. It's taken as a sign of economic strength (again, because consumer spending accounts for such a huge percentage of the U.S. economy), as well as inflationary pressures and an indicator of whether the Federal Reserve is likely to raise or lower interest rates. Issuers: U.S. Commerce Department and Census Bureau. Frequency: monthly; mid-month.
Leading Indicators
Leading indicators are typically the ones used to help make key day-to-day decisions, because they tend to indicate economic conditions six to nine months into the future. As a result, these are the indicators with the greatest potential to move the markets noticeably when they're released.
- Institute for Supply Management (ISM) index. This index is based on a survey of purchasing executives at some 300 major industrial companies, reflecting their firms' activities aimed at future production. The index covers nine production factors, including new orders, production, employment, supplier deliveries, inventories, prices, new export orders, imports, and order backlog. Considered to be the single best barometer of conditions in the manufacturing sector, a value of 50 and higher signals economic expansion, and a value below 50 signals contraction. Issuer: Institute for Supply Management. Frequency: the first business day of every month; covering the previous month's data.
- Consumer confidence index. This indicator is a summary of interviews with some 5,000 consumers nationwide (for a random sample of Americans) on their feelings about their own financial condition, the strength of the economy, and their outlook for the next six months. Historically, changes in this index have tracked the leading edge of the business cycle well, as it indicates how willing consumers are to spend more and make big-ticket purchases (like a car or a home). A strong report when the economy has been weak can spur a short-term rise in stock prices. Some economists look for an increase of at least five percentage points before calling for a change in the economic trend. Issuer: The Conference Board. Frequency: the last Tuesday of every month; covering the previous month's survey.
- Housing starts and building permits. This indicator reports on both the number of housing units on which construction has begun, as well as the number of units for which permits have been issued. It's generally regarded as a good indicator of future home sales and consumer spending in general. Permits typically are a good indicator of housing starts three to four months in the future. Issuer: the U.S. Census Bureau. Frequency: monthly; around the 18th of the month.
- Stock market prices. Stock price trends are considered one of the most important indicators of future economic conditions, which tend to indicate future economic health some six to nine months into the future.
Only a portion of major economic indicators that economists and investment professionals watch on a regular basis have been reviewed. The truth is that all of the major indicators are meaningful, but tend to make the most sense when taken in context with each other. Even when they tell a clear story, what they can't tell you is whether you need to adjust your portfolio and how. To get the latest reading on what the economic indicators are saying and what they might mean for your investment strategy, please call.