Contents
Preface
Economic indicators are data used to evaluate the overall changes in an economy and are mainly compiled in the form of statistics for various economic activities. The indicators is used to measure the economic development of a country. There are three types of economic indicators, depending on their attributes for market price changes: leading, coincident and lagging indicators.
What are leading, coincident, and lagging economic indicators?
Traditionally, leading indicators can “predict economic changes in advance” and have long-term predictive value! Some people believe that it can be used in investment to determine the future market. While in the digital logic definition, leading indicators refer to “reflecting economic growth in advance.”
Since the market price is already being a leading indicator of what people expect for the future, it is crucial to stay ahead of the market price in order to have extra benefits in investing.
Therefore, “leading indicators” in investment do not mean leading predictors of the economy; they mean “economic indicators that have the ability to predict the market price.” By contrast, lagging indicators provide delayed feedback after the price movement has already occurred, while coincident indicators is refer to indicators that represent the current status of the market economy.
In practice, most leading indicators have difficulty in “consistently” predicting market price, and the outcomes are considered unstable. In a short time, the impact of economic indicators on stock price depends on the gap between “forecast” and “actual.” Generally speaking, before different economic indicators are released, there are various forecasts of the data in the market. After the publishing of the actual indicators, the result may be higher or lower than expected, and the difference will usually affect market price in the short term.
Catch up the trends! Check these leading indicators!
The Leading Economic Index (LEI) is an index published monthly by The Conference Board. It is composed of 10 economic components. The Conference Board releases the data for the previous month on the last business day. It is used to predict the direction of economic movements, which can indicate the near-future performance of the U.S. economy.
Do you know what the components of LEI are?
The 10 components of the LEI are:
1. Average weekly hours worked by manufacturing workers.
2. The average number of initial claims for unemployment insurance.
3. The volume of manufacturers’ new orders for customer goods and materials.
4. The new orders index from the Institute for Supply Management.
5. The volume of new orders for nondefense capital goods, excluding aircraft orders.
6. The number of new building permits for residential buildings.
7. The S&P 500 stock index.
8. Interest rate spread between 10-Year Treasury Bill and Fed Funds Rate
9. Leading Credit Index.
10. Average consumer expectations for business conditions.
Observe current market conditions! Check these coincident indicators!
Coincident indicators are economic statistical indicators that change simultaneously with general economic conditions and reflect the current status of the economy. Many policymakers and economists are interested in this real-time data since it can illustrate the current outlook and measure trends and influences of the economy.
The Conference Board combines 4 coincident indicators into the Coincident Economic Index (CEI), which will announce the previous month’s data on the last working day of each month. This data is mainly used to reflect the current state of the economy.
The 10 components of the CEI are:
1. Employees on nonfarm payrolls.
2. Personal income less transfers payments.
3. Index of industrial production.
4. Manufacturing and trade sales.
Determining long-term trends is a must! Check these lagging indicators!
Lagging Indicators represent economic indicators that come after economic changes. I a reference for measuring the historical performance of the economy. Although it can’t indicate the present state of the economy, it can show how the economy is shifting over time and help determine the long-term trend.
The Conference Board has compiled 7 lagging indicators to form the Lagging Economic Indexes (LAG), which will report the previous month’s data on the last working day of each month. This data is mainly used to analyze the long-term economic trend by referring to how the economy changes.
The 10 components of the LAG are:
1. Average duration of unemployment.
2. Ratio, manufacturing and trade inventories to sales.
3. Change in labor cost per unit of output, manufacturing.
4. Average prime rate charged by banks.
5. Commercial and industrial loans outstanding.
6. Ratio, consumer installment credit outstanding to personal income.
7. Change in Customer Price Index for services.
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