There are several economic factors that change prior to, after, or simultaneously with the business cycle. These factors are examined by analysts to determine the current state of the economy. We will examine the three common types of indicators below.
Leading Indicators: A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy, but are not always accurate. Bond yields are typically a good leading indicator of the market because traders anticipate and speculate trends in the economy.
Other types of leading indicators include:
- building permits (new private housing)
- industrial production rates
- money supply
- S&P 500
average of weekly unemployment insurance claims
Lagging Indicators: A measurable economic factor that changes after the economy has already begun to follow a particular pattern or trend. Lagging indicators confirm long-term trends, but do not predict them. Interest rates (especially the prime interest rate) are a good lagging indicator; rates change after severe market changes. Other examples are:
- unemployment rates
- corporate profit
labor cost per unit of output
Coincident Indicators: An economic factor that varies directly and simultaneously with the business cycle, thus indicating the current state of the economy.
Some examples include:
- nonagricultural employment
- personal income
- inventory/sales ratio
Economic indicators can have a huge impact on the market and knowing how to interpret and analyze them is important for all investors.
Without further ado, the tutorial Economic Indicators to Know will examine 11 economic indicators we feel investors should understand.
Each one tells a story, so hopefully our explanations will help you interpret them like a pro. Note that you will not be tested on the details contained in this tutorial on your upcoming Series 6 exam.
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