Economic indicators: what they are, and what they tell us
Economic indicators are used to gauge the state of the economy. There are three types of indicators that are considered when looking at the economy: past, present, and future. These economic indicators are referred to as lagging, coincident, and leading indicators, respectively. Here is a quick and dirty explanation of each, along with a few examples.
Lagging economic indicators
If you’ve ever wondered at a statement on the news about a set of data confirming that the economy has indeed strengthened (or weakened) over the past, say, six months, you might be tempted to thank your local newscaster, Captain Obvious, and change the channel. It is true that by the time a change in the economy has taken hold, it is often evident to anybody paying attention to such things. Where these indicators are helpful, though, is in quantifying the breadth and depth of the change in the economy. Lagging economic indicators can confirm a change in the economic cycle is occurring, or has occurred. Also, these indicators often provide a more nuanced understanding of the changes in the economy: sector A has improved greatly, but sector B only slightly. Lagging indicators take time to collect and collate, and can not be reported until after the end of the time period in question.
List of lagging indicators:
- factory and equipment investment
- business loans
Coincident economic indicators
These economic indicators indicate change in a much more current way than lagging indicators; they quantify the current state of the economy. More frequent collecting and reporting of this data allows it to be published more often, and with a shorter lag. Of course, by the time the data is collected, crunch, and published, it isn’t absolutely current anymore, but it is much more so than lagging indicators.
List of coincident indicators:
- individual income
- industrial production
- retail sales
Leading economic indicators
These indicators tend to peak and trough before the economy as a whole, so they are a useful bellwether for what will follow. These indicators often get the most press because they predict what will be coming down the pike, and let’s face it, knowing what’s going to happen is often a lot more interesting (and profitable) than knowing what has already happened.
If you want to delve into the numbers yourself, you can do so by looking at the Government of Canada leading indicators composite index. The first line in the table, the “composite leading indicator”, in bold text, is the easiest to understand. It consolidates all of the numbers into a single value. (In 1992, these indicators were measured, and an arbitrary value of “100” was assigned. This allows change to be measured on a consistent scale over time.)
List of leading indicators:
- housing starts
- new manufacturer orders
- commodity prices
- average hours worked per week
- stock prices
- money supply
Commit these definitions and examples to memory, and you’re sure to be insufferable at your next dinner party!