Economic Indicators
July 6th, 2018 by Tanner WrisleyWhen asked about the health of the U.S. economy, people tend to respond in very simplistic terms. One might say the economy is doing “well” or the economy is doing “poorly”. This response generalizes the way people feel about their economic situations. But what if we could actually measure the status of our economy with certain metrics? We can! Kind of… As with most topics in the economic sphere, it is not an exact science. However, economic indicators are widely used to tell us about our economy.
There are three different types of economic indicators – leading, coincident, and lagging indicators – each have a number of metrics pertaining to them. A leading economic indicator is typically used to predict or signal future economic direction[1]. New housing starts are an example of this; an increasing amount of new houses indicate a strong economy going forward. The stock market is also considered a leading indicator because it comprises the total feeling of investors and their confidence in businesses and the economy.
A coincident economic indicator occurs at the same time as the economy it measures. A widely used example of this is gross domestic product (GDP). GDP tells us how the economy is doing right now, but does not necessarily tell us anything about where the economy will be going.
A lagging economic indicator shows us where the economy has been. For example, earnings reports from corporations give us an idea of how well companies have done over the last quarter or last year. Impressive earnings indicates that the economy was doing well over that period of time, but does not tell us how it is doing now or how it will do in the future. Lagging indicators are important because they can confirm or disprove an economic condition already thought to be known.
Even with these indicators, measuring the economy is still very difficult. As I mentioned earlier, it is not an exact science. At any given point, there may be two leading indicators pointing towards different economic futures or a lagging indicator showing less impressive economic results than others. Attempting to decipher which metrics to pay attention to is challenging, so it helps to look at everything as a whole to see if there are any underlying themes.
Currently, we are seeing a very mixed bag of leading indicators, with positive looking coincident and lagging indicators. The stock market has performed poorly on the year. However, U.S. manufacturing production has increased[2]. These leading indicators contradict. Coincident indicators like GDP have increased this year and CPI, which measures inflation, was up 2.8% over the year ending in May[3]. These both indicate a strong economy. Corporate earnings and unemployment rates are amongst the many lagging indicators also showing that we have had a strong economy over the last few years. The take away here is that the economy is growing, but we will have to keep a close eye on all of these indicators to watch out for any shifts in the direction of our economy.
[1] What are leading, lagging and coincident indicators? https://www.investopedia.com/ask/answers/what-are-leading-lagging-and-coincident-indicators/ Investopedia
[2] United States Manufacturing Production https://tradingeconomics.com/united-states/manufacturing-production Trading Economics
[3] Consumer Price Index https://www.bls.gov/cpi/ Bureau of Labor Statistics