Introduction To Coincident And Lagging Economic Indicators

By Bruce Allen AAA

If leading economic indicators are designed to help investors understand where the economy is heading, coincident and lagging indicators suggest where we are and where we've been. Many of the most familiar and widely reported economic statistics are coincident indicators, all of which release monthly. This article outlines some of the major indicators and their uses.

Coincident Indicators: Inflation

Producer Price Index (PPI)
Released by the Bureau of Labor Statistics (BLS) second or third week of the month, the Producer Price Index (PPI) tracks price changes at the wholesale level, breaking out data for commodities and intermediate and finished goods.

The report's methodology uses a "basket-of-goods" approach to simulate the overall economy and incorporates hedonic adjustments to account for qualitative changes in products. As such, the PPI number is somewhat manufactured. It typically predicts the Consumer Price Index number very well, but due to its abstraction, it may be less indicative of what is actually taking place in the economy.

Consumer Price Index (CPI)
Also released by the BLS second or third week of the month, the Consumer Price Index (CPI) tracks price changes at the retail consumer level, again using the basket-of-goods approach. It, too, is a manufactured number. It is widely equated with the inflation rate but has a number of flaws. The core rate excludes volatile energy and food prices. The chain-weighted index models the substitution effect – the theory that buyers will purchase more of a less-costly item as the price of a similar item rises – as consumers react to rising prices. Some economists suggest that it intentionally understates inflation, as the government uses it to adjust Social Security payments. Regardless, the Federal Reserve pays close attention to the CPI in setting monetary policy.

Retail Sales Report
The Retail Sales Report is released by the Census Bureau and the Department of Commerce on or around the 13th of the month. This report acts like a leading indicator in that increases often precede higher CPI numbers, and decreases raise the specter of recession. The data is highly detailed; investors can look at specific industries in which they hold positions. The figures vary widely from month to month, necessitating the use of moving averages. And although the data is fresh, revisions released two months after the initial report can dramatically alter the picture it presents.

Personal Income And Outlays
The Personal Income and Outlays is released 4-5 weeks after the month end by the Bureau of Economic Analysis (BEA). It tracks incomes, spending and, by deduction, personal savings rates. Data is typically two months old, and the information follows the CPI report by several weeks. Despite this, the Fed pays at least as much attention to this report as it does the CPI in setting monetary policy.

Coincident Indicators: Production and Foreign Trade

Industrial Production Report
The Industrial Production Report is a Federal Reserve product. It is released on or around 16th of the month. As manufacturing occupies an increasingly smaller place in the overall economy, this report's importance has diminished over time. The Fed watches it more closely than many analysts do, since it will reflect increases in raw materials' prices early on and it is procyclic. Unfortunately, it ignores the burgeoning service sector, as well as construction activity.

Non-Manufacturing Report
The Institute of Supply Management (ISM) puts out the Non-Manufacturing Report. The report is released on third business day of the month. Initiated in 1998, this report tracks the growing service sector of the economy, providing information not found elsewhere. It collects rather imprecise "higher, same or lower" responses concerning business activity from purchasing managers. However, when combined with the ISM's Purchasing Managers' Index (PMI) report, it covers roughly 90% of the economy.

Trade Balance Report
The Trade Balance Report, from the Census Bureau, is a comprehensive report that examines U.S. exports and imports and includes data for the service and financial sectors. The most publicized component of the report is the current account balance, the "net" figure that has been negative for decades. The size of the monthly deficit is a countercyclical indicator, declining during recessions and increasing during expansions. Rising domestic interest rates typically cause the dollar to rise against foreign currencies, depressing exports and widening the trade deficit.

Lagging Economic Indicators
For most investors, lagging economic indicators are of little practical use. The Fed's monthly Consumer Credit Report is generally upstaged by the Consumer Confidence and Retail Sales reports. It is released around 5 weeks after the month end. The Employee Situation Report, released on first Friday of the month by the Bureau of Labor Statistics, contains little information that can't be gleaned from weekly unemployment claims information. It sheds little light beyond whether people are working or not. And the monthly Wholesale Trade Report from the Census Bureau contains stale data regarding supply and demand imbalances. It is released on or around 9th of the month.

About Quarterly Reports
Three quarterly reports can function as indicators:

The GDP is the mother of all indicators, and the other two are virtually inconsequential. The GDP growth rate, a coincident indicator from the BEA, measures the extent to which the overall economy is growing or shrinking. It is the most macro of the indicators, requiring months to calculate and several more months after release to finalize and revise. It is released on the last day of each quarter.

Analysts look for two consecutive quarters of negative real GDP growth before calling a recession, putting them roughly seven months behind the man in the street. In today's large economy, the "turning a battleship" analogy applies as the report does little more than confirm what most investors already know, and it doesn't change anything.

The other two quarterly reports from the BLS - the ECI and the Productivity Report - are generally ignored by most analysts. The ECI, released on the last day of each quarter, is a lagging indicator and is more useful for business managers wishing to compare their company's labor costs to their industry than it is for investors. Last and least, the Productivity Report is derived from other previously released reports and contains very little new information.

Conclusion
A plethora of economic indicators is available to investors, some of which are more useful than others. Whether you're looking for a current status overview of the economy or a specific sector, or you wish to confirm an established trend, a coincident or lagging indicator  can help.

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