Cathy Michael
Types of Indicators
- Leading Indicators-These types of indicators signal future events. Think of how the amber traffic light indicates the coming of the red light. In the world of finance, leading indicators work the same way but are less accurate than the street light. Bond yields are thought to be a good leading indicator of the stock market because bond traders anticipate and speculate trends in the economy (even though they aren't always right).
- Lagging Indicators-A lagging indicator is one that follows an event. Back to our traffic light example: the amber light is a lagging indicator for the green light because amber trails green. The importance of a lagging indicator is its ability to confirm that a pattern is occurring or about to occur. Unemployment is one of the most popular lagging indicators. If the unemployment rate is rising, it indicates that the economy has been doing poorly.
- Coincident Indicators-these indicators occur at approximately the same time as the conditions they signify. In our traffic light example, the green light would be a coincidental indicator of the associated pedestrian walk signal. Rather than predicting future events, these types of indicators change at the same time as the economy or stock market. Personal income is a coincidental indicator for the economy: high personal income rates will coincide with a strong economy.
Leading Indicators
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Conference Board Index of Leading Economic IndicatorsAbout The Conference Board Leading Economic Index® (LEI) for the U.S.: The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The indexes are constructed to summarize and reveal common turning points in the economy in a clearer and more convincing manner than any individual component. The CEI is highly correlated with real GDP. The LEI is a predictive variable that anticipates (or “leads”) turning points in the business cycle by around 7 months. Shaded areas denote recession periods or economic contractions. The dates above the shaded areas show the chronology of peaks and troughs in the business cycle.
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Consumer Price Index (CPI) from the U.S. Bureau of Labor Statisticsis a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.
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Producer Price Index (PPI) Bureau of Labor Statisticsprogram measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.
Lagging Indicators
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Conference Board Index of Lagging Economic IndicatorsThe Index of Lagging Indicators is made up of seven economic series that have historically registered a change after the change has taken place. The seven lagging components are averaged to smooth their results, and adjusted for volatility.
Coincident Indicators
Coincident indicators usually change with the economy as a whole. The Conference Board publishes a monthly news release on U.S. Business Cycle Indicators, which contains the Index of Coincident Economic Indicators and related composite economic indexes. The Index of Coincident Economic Indicators consists of the following indicators.
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Number of Employees on Non-Agricultural Payrolls from the BLS (Bureau of Labor Statistics)The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls.
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Index of Industrial Production- (Federal Reserve Bank of St. Louis)The physical volume of goods produced by the manufacturing, mining, and electric utility sectors. Although the industries covered account for about 25 percent of GDP, they account for the bulk of the volatile movements in business activity.
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Personal Income Less Transfer Payments (Federal Reserve Bank of St. Louis)Derived by subtracting transfer payments, which are often counter cyclical, from total personal income. Personal income is the main component of consumer purchasing power. Personal income includes compensation for labor, proprietors’ income, rental income, and income from interest and dividends. Transfer payments include government payments for programs such as Social Security and Medicaid.
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Manufacturing and Trade Inventory and Sales (U.S. Census Bureau)The aggregate value of sales by the manufacturing, wholesale, and retail trade sectors of the economy.