Economic Indicators

An economic indicator presents information on the phase of the overall economy. Economic indicators consist of data on an economy’s recent past activity or its current or future position in the business cycle.

Leading indicators have pivotal moments that lead those of the overall economy. Leading indicators often used for forecasting short-term future trends. This variable often changes with the business cycle but the consistent period before a reversal in the business cycle.

Coincident indicators have pivotal moments that are usually near to those of the overall economy. Coincident indicators often used for categorizing the economy’s current state.

Lagging indicators have pivotal moments reflecting the overall economy’s historical performance — lagging indicators are used to categorize the economy’s past condition.  

Although specifics for leading, coincident, and lagging indicators vary in different economies, they have much in common. Experts may use the specific indicator and composite indicators, which reflects overall economic indicators. These indicators are also incorporated in a diffusion index, which indicates how many indicators are positive and negative. For example, if 8 indicators are positive in leading indicators, then the possibilities are that the economy is expanding.

In the United States, The Conference Board regularly issues several indicators that investors and policymakers broadly pursue. These indicators are as follows:

Leading Indicators

1- Average weekly hours, manufacturing

2- Average weekly initial claims for unemployment insurance

3- Manufacturers’ new orders, consumer goods and materials

4- Vendor performance, slower deliveries diffusion index (ISM new order index)

5- Manufacturers’ new orders, non-defense capital goods

6- Building permits, new private housing units

7- Stock prices, 500 common stocks

8- Money supply, M2

9- Interest rate spread, 10-year Treasury bonds less Federal funds (%)

10- Index of consumer expectations

Coincident Indicators

1- Employees on nonagricultural payrolls

2- Personal income less transfer payments

3- Index of industrial production

4- Manufacturing and trade sales

Lagging Indicators

1- Average duration of unemployment

2- Inventories to sales ratio, manufacturing and trade

3- Change in labor cost per unit of output, manufacturing (%)

4- Average prime rate charged by banks (%)

5- Commercial and industrial loans outstanding

6- Consumer installment credit outstanding to personal income ratio

7- Change in consumer price index for services (%)

Leading Indicators

1- Average weekly hours, manufacturing

The U. S. Department of Labor’s Bureau of Labor Statistics surveys manufacturing industries and compiles a comprehensive monthly report of employment conditions. This series measures average weekly hours per worker by production or factory-type workers in manufacturing industries. The data is adjusted for seasonal variation.

Analysts generally consider overtime decline a negative signal for the labor workforce; possible layoffs may follow the trend. Overtime increases, on the other hand, are regarded as cyclical upturn and rehiring possibilities.

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2- Average weekly initial claims for unemployment insurance

Average weekly initial claims measure the number of unemployment applications filed by persons looking to receive jobless benefits. The U. S. Department of Labor’s Bureau of Labor Statistics collects these claims in the US and adjusts for seasonal variation. This indicator represents a more sensitive signal for initial layoffs and rehiring.

Increasing initial claims are recognized as poor employment conditions.

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3- Manufacturers’ new orders, consumer goods and materials

This indicator offers broad-based, monthly statistical data on economic conditions in the domestic manufacturing sector. The Census Bureau surveys the manufacturers’ shipments, inventories, and orders and measures current industrial activity, capturing changes in business sentiment and possible future business trends. The data is adjusted for seasonal variation.

Increases in new orders may indicate production surges and upturns in the economy.

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4- Vendor performance, slower deliveries diffusion index (ISM new order index)

This factor reflects the month-to-month difference in new orders for final sales, which measures the time the industrial companies receive deliveries from their suppliers. The National Association of Purchasing Management surveys purchasing managers about the delivery speeds of their suppliers comparing the previous month.

The weakening of demand may speed up the deliveries and may signal a possible recession.

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5- Manufacturers’ new orders, nondefense capital goods

As stated above in manufacturers’ new orders, consumer goods, and materials, this indicator offers broad-based, monthly statistical data on economic conditions in the domestic manufacturing sector. The Census Bureau surveys the manufacturers’ shipments, inventories, and orders and measures current industrial activity, capturing changes in business sentiment and possible future business trends. The data is adjusted for seasonal variation.

Increases in new orders may indicate production surges and upturns in the economy. These new orders also imply business expectations.

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6- Building permits, new private housing units

This series measures the monthly change of new residential housing permits. The Census Bureau surveys all new residential construction in the United States. The data is adjusted for seasonal variation.

This indicator reflects new construction activity.

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7- Stock prices, 500 common stocks

This series tracks the S&P 500 index. Equity market returns reflect economic turning points, both upturn, and downturn.

This indicator expresses a useful early signal on economic cycles.

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8- Money supply, M2

The money supply comprises currency, demand deposits, other checkable deposits, travelers’ checks, savings deposits, small-denomination time deposits, and money market mutual funds balances. The Federal Reserve adjusts the money supply for seasonal variation.

When the money supply does not match inflation, bank lending may deteriorate and generate adverse shocks. This indicator may result in a deep recession for the economy.

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9- Interest rate spread, 10-year Treasury bonds less Federal funds (%)

This interest rate spread is the difference between the 10-year Treasury bond rate and the Federal funds rate. Generally, long-term yields indicate market expectations about the path of short-term interest rates.

A wider spread (long-term yield is way higher than short-term interest) signals an economic upswing.

A narrower spread (long-term yield is slightly higher than short-term interest) suggests an economic downturn.

An inverted yield curve spread (short-term interest is higher than long-term yield) demonstrates a reliable recession indicator.

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10- Index of consumer expectations

This series is the only leading indicator that is based on expectations. The University of Michigan’s Survey Research Center surveys a minimum of 500 American households and asks about consumer sentiments regarding personal finances, business conditions, and buying conditions.

Consumers tend to increase their spending when they are optimistic about future economic conditions. Consumer consumption represents more than 65% of the US economy. This index suggests an early direction about the economy.

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Coincident Indicators

1- Employees on nonagricultural payrolls

This series refers to both full-time and part-time workers except for farm work. The Bureau of Labor Statistics releases monthly data on the first Friday of the following month.

Businesses adapt their actual net hiring and firing according to the recession or recovery phase in the economy. Analysts closely track series for assessing the health of the economy.

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2- Personal income less transfer payments

Personal income includes payments to individuals and non-corporates such as income from wages and salaries and other earnings but excludes transfer payments from governments such as Social Security payments.

The US Bureau of Economic Analysis publishes monthly data on the last Friday of the current month. This measure captures the current phase of the economy.

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3- Index of industrial production

This indicator captures the output of productions in the manufacturing, mining, and utility industries, which are the most volatile part of the economy. The service sector is generally not used as an economic indicator due to its stable trends.

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4- Manufacturing and trade sales

This indicator tracks sales at the manufacturing, wholesale, and retail levels. This series represents a measure of the current phase of the business activity but is much more volatile than other coincident economic indicators due to procyclical actual total spending.

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Lagging Indicators

1- Average duration of unemployment

This aggregate measures the average duration of unemployed individuals.

Businesses tend to delay the layoff processes until recessions undoubtedly affect their work and postpone the rehiring process until recoveries seem guaranteed.

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2- Inventories to sales ratio, manufacturing and trade

The Bureau of Economic Analysis uses inflation and seasonally adjusted inventory and sales data of manufacturing, wholesale, and retail businesses.

Inventories tend to accumulate as sales decline, which means the ratio increases during the recession phase. Declining inventory levels and increasing sales reflect an expansion. Due to businesses’ delayed reporting, this ratio is assessed as a lagging indicator.

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3- Change in labor cost per unit of output, manufacturing (%)

Manufacturing businesses volatile part of the economy, and these are used as a good indication. Companies tend to delay laying off employees, resulting in increased labor costs in the early stages of a recession. Labor costs also surge as the labor market gets tight and increasing wages during the late stages of recovery. This indicator helps to determine cyclical turns, but with a lag.

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4- Average prime rate charged by banks (%)

A prime rate is charged to a bank’s least risky borrowers and used as a benchmark for other types of loans. This indicator generally lags behind cyclical turns.

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5- Commercial and industrial loans outstanding

Business loans provide credits for inventory financing and investment activities. These loans generally lag the cycle.

These loans tend to peak during recessions and decline after the end of the recession.

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6- Consumer installment credit outstanding to personal income ratio

Consumers initially postpone consumer credits at low-level personal income. Individuals tend to borrow more when they are confident, but debt levels accumulate during declining personal income.

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7- Change in consumer price index for services (%)

This indicator measures the inflation rates of the services sector. Inflation generally adjusts to the cycle late, especially in the more stable services area.

Service sector inflation tends to rise during the beginning of a recession and to decline in the beginning phase of expansion.

Click image to view current data.

Bottom Line

Economic indicators are usually intuitive and structurally simple. However, economic indicators are not perfect, and these statistics are subject to periodic revisions. These indicators may also provide false signals. However, movements in economic variables help to structure investors’ expectations.

Sources: The Conference Board, The Federal Reserve Bank of St. Louis, CFA Institute, Institute for Supply Management, The University of Michigan – Surveys of Consumers.

Author

Covers investment, financial analysis and related financial market issues for BrightHedge. He has extensive experience in portfolio management, business consulting, risk management, and accounting areas.

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The investment information, comments and recommendations contained herein are not subject to investment advice. The comments and recommendations contained herein are based on personal views. These views may not fit your financial situation and your risk and return preferences. For this reason, based only on the information contained herein, investment decisions may not have the appropriate outcome.