What is an Economic Indicator?
An economic indicator is a report that shows the status of the publishing country’s or region’s economic health and investment potential. Market volatility is generally expected around the release of such reports. Examples of economic indicators include, but are not limited to:
What Types of Economic Indicator Are There?
Following economic indicators is a good way for investors to formulate an idea about the state of a country’s or region’s economy, enabling them to adjust their investment strategies accordingly. Although there are numerous indicators for investors to follow, these are usually separated into three distinct categories:
Leading indicators are used to forecast how an economy will move in the future. This means that these types of indicators usually precede actual movements in the economy itself. Such events are important for governments and central banks, as they can be used to identify impending negative economic events, such as recessions, allowing for policies to be implemented in an effort to combat them. Investors can use leading economic indicators to inform their strategies when investing in assets that are directly linked to a specific country’s or region’s economy.
Examples of leading indicators include Consumer Confidence Index (CCI), which measures the public’s optimism about the current and future state of the economy, and Initial Jobless Claims, which measures the number of people that have claimed benefits for the first time. These are important economic indicators as high public confidence in the economy and a high employment rate can both lead to an increase in spending, which leads to economic growth.
Lagging indicators show changes in an economy after they have taken place. Rather than pointing to the potential future direction of an economy, as with leading indicators, lagging indicators reflect changes in a given economy over time. These indicators can be used by investors to identify and confirm the strength of long-term trends in the financial markets.
Examples of lagging indicators include Consumer Price Index (CPI), which measures changes in the cost of living, and Trade Balance, which measures the difference between a country’s imports and exports. CPI is an important indicator as it can be used to identify periods of inflation, while Trade Balance is important as any country running a large trade deficit (higher imports than exports) may accumulate large debts and, thus, experience a devaluation in their currency.
Coincident indicators offer important insight into the current state of an economy, as they usually experience changes in line with the economy itself. This enables investors to gain a clear understanding of any current market trends, allowing them to adjust their strategies appropriately.
Examples of coincident indicators include Gross Domestic Product (GDP), which measures the value of all goods and services produced in a given country over a specific period of time, and Retail Sales, which measures changes in the value of retail products sold such as food, clothing and automobiles. GDP is an important indicator as it can be used to compare one country’s economy with that of another’s, and as a measure of economic growth. An increase in Retail Sales can point to potential inflation, as more money enters the economy, whereas a decrease, which signifies a lack of consumer spending, may point to an impending recession.
What Are the Issues with Economic Indicators?
Although economic indicators can provide investors with important insights into the global financial markets, their usefulness is limited by how the data they provide is interpreted. Experienced investors know that relying on a single indicator to predict economic movements and inform their investment strategies is not ideal. Rather, it is better to take the data provided by numerous economic indicators and combine them to gain a more comprehensive overview of the state of an economy and the effects that may be felt in the global financial markets.
For example, a low unemployment rate is often linked to economic growth. However, periods of high employment are also often expected to lead to wage growth, as it creates competition between employers to attract skilled workers. If during a period of low unemployment, wage growth seems to be stagnating, then the expected growth in the economy may not materialise. Thus, combining multiple economic indicators is important for investors looking to build a clearer picture of a country’s overall economy.