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. (For more on these indicators, see
Leading Economic Indicators Predict Market Trends and
What are leading, lagging and coincident indicators?)
Coincident Indicators: Inflation
Producer Price Index (PPI)
Released by the
Bureau of Labor Statistics (BLS), 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 includes use of 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, 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. (For more information, read
The Consumer Price Index: A Friend To Investors.)
Retail Sales Report
The
Retail Sales Report is released by the Census Bureau and the
Department of Commerce. 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 its release can dramatically alter the picture it presents. (To learn more about what consumer spending can indicate about market conditions, read
Using Consumer Spending As A Market Indicator.)
Personal Income And Outlays
The
Personal Income and Outlays release, from the
Bureau of Economic Analysis (BEA), 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. (Read more in
Formulating Monetary Policy.)
Coincident Indicators: Production and Foreign Trade
Industrial Production Report
The
Industrial Production Report is a product of the Federal Reserve. 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. (Learn more about investing in construction in
Build Your Portfolio With Infrastructure Investments.)
Non-Manufacturing Report
The Institute of Supply Management (ISM) puts out the
Non-Manufacturing Report. 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. (Learn the advantages of investing in specific sectors in
Singling Out Sector ETFs.)
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. (Read more in
Understanding The Current Account In The Balance Of Payments.)
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. The
Employee Situation Report, released monthly 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. (Read more in
Consumer Credit Report: What's On It and
Surveying The Employment Report.)
About Quarterly Reports
There are three quarterly reports that 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, takes months to calculate and several more months after release to finalize and revise.
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 a $13 trillion 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. (For background reading on the GDP, see
The Importance Of Inflation And GDP.)
The other two quarterly reports from the BLS - the ECI and the Productivity Report - are generally ignored by most analysts. The ECI 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
There is a plethora of economic indicators 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 wish to confirm an established trend, there is likely a coincident or lagging indicator that can help.
For further reading on these and other indicators, be sure to read our
Economic Indicators tutorial.
by Bruce Allen, (Contact Author | Biography)
