Almost on a daily basis, investors are swamped with data, some forward-looking, others rear-view mirror data. Knowing where the data fits in a timeline is critical to any investment decision.
Leading Economic Indicators
Leading economic indicators predict where the economy is headed. A prime example of a leading indicator is the stock market. Stock prices take into account investor expectations. High expectations produce higher prices while dashed expectations lead to sell-offs. Interest rates and yield curves have predictive value, as do foreign-exchange rates and raw materials prices. The Census Bureau’s durable goods and housing starts data are other examples of leading indicators. Durable goods data gauges heavy industry strength and demand for items designed to last three years or more. Housing starts see a pick up in activity as the business cycle expands. The Conference Board, a not-for-profit organization that identifies peaks and troughs in business cycles in the U.S and eight other countries around the world, releases a Leading Economic Indicator (LEI) series considered the industry standard.
Coincident Economic Indicators
Coincident indicators define where the economy is right now. Examples include industrial production figures compiled by the Federal Reserve Bank, construction spending and new home sales tracked by the Census Bureau, along with manufacturing and trade sales and retail sales. Personal income, consumption and retail sales are monthly barometers of where the consumer fits in relation to the current state of the economy. The Bureau of Labor Statistics releases inflation data on both the wholesale (producer price index) and retail (consumer price index) level. The Conference Board considers some of this activity when calculating its coincident economic indicator and releases this data along with its monthly LEI series.
Lagging Economic Indicators
Lagging indicators show how the economy has performed. The two most widely followed pieces of the economic puzzle are both rear-view mirror depictions of economic activity while garnering the most attention. The unemployment rate is calculated by the Bureau of Labor Statistics (BLS) and released in its monthly Employment Situation Report on the first Friday of the month. The data covers the preceding month and includes the number of jobs created or lost as a coincident indicator and average hourly earnings and average hourly work-week, a leading indicator. The quarterly Gross Domestic Product (GDP) report comes from the Bureau of Economic Analysis (BEA) and represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (exports minus imports). The data is for the previous quarter and is subject to revision. The most recent report showed the U.S. economy contracting at an annual pace of 6.2% in the fourth quarter of 2008, compared with a 0.5% third quarter contraction. Conventional wisdom defines two back-to-back negative quarters of growth as a recession.
The importance of each data is a function of its relation to the business cycle. As the U.S. economy recovers, data such as the unemployment rate will decrease in importance, supplanted by data confirming recovery, such as retail sales and inflation. Knowing where the economy is relative to the business cycle is critical to the success of any investment strategy.
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