What drives economic cycles?
- Total spending is the engine driving economic growth.
- Economic growth leads to employment and a stronger labor force.
- A strong labor force leads to higher levels of productivity.
- Productivity keeps prices stable.
- Stable prices promote more spending.
Favorable conditions | Unfavorable conditions |
consistent spending/demand | weak or excessive spending/demand |
rising employment | rising unemployment |
high productivity -> excess supply | low productivity -> supply shortage |
stable supply chain | unstable supply chain |
stable prices -> price stability | unstable prices -> inflation |
Financial markets are highly sensitive to unexpected changes in the economy so environmental conditions must be forecasted. When unforeseen events escape the forecast policymakers will use their tools to soothe economic uncertainty.
The market (macroeconomist, institutional investors, market makers, traders) forecasts, monitors, and confirms changes in the economy using time-tested economic indicators.
Types of Economic Indicators
Using economic indicators are similar to driving a vehicle. Leading indicators are like looking through the front windshield, to see what's in front of you. Coincident indicators are like looking through the driver-side or passenger-side windows, to see where you are in real-time. Lagging indicators are like looking through the rearview mirror, to see where you're coming from.
leading indicators | coincident indicators | lagging indicators |
front windshield | side view | rearview mirror |
forecast future economic changes | monitors economic changes in real-time | confirms economic changes (results) |
tells where the economy is headed | tells where the economy is | tells where the economy has been |
The Business Cycle & Economic IndicatorsEvery week of every month the business cycle presents new data about the economy. This means the economy is constantly moving through time. Economic indicators help to re-group the data into past, present, and future time values. In other words, lagging, coincident, & leading indicators gauge direction and speed.
Once the data is separated into sectors and placed under time values, the business cycle can be observed as a whole system, from start to finish, and broken into parts.
Each sector (Business activity, consumer strength, employment, housing) moves at a different pace within the overall business cycle. By separating the business cycle into sectors you can identify and compare changes by asking a few questions.
- First, which sectors are showing a trend shift in the data?
- Second, do other sectors coincide with those changes?
- Third, is there enough corroborating evidence from other macro factors (policy, interest rates, commodities, etc) to forecast a macro shift?
- Last, are those changes temporary or insignificant?
Leading Indicators
Leading indicators are "forward-looking" so they reflect where the economy is headed.
Purchasing Managers Index (PMI)
- Forecasts business conditions
Durable Goods Orders
- Forecasts business activity in manufacturing goods
Durable goods orders track the month-to-month changes in new orders placed with manufacturers for the delivery of hard goods that last a minimum of 3 years. These account for most big-ticket items such as washers, dryers, refrigerators, and air conditioners; cars, trucks, construction materials, medical equipment, jewelry, books, tools, computers, televisions, and other electronics; and home and office furnishings.
Durable goods orders Ex-defense 👇
Gov defense spending can dilute or skew the spending data from the real economy considering a single Jet costs $10-$100 million. Therefore, Ex-defense removes government spending to reflect the real-economy.
Building Permits
- Forecasts real estate/housing activity
Construction Spending
- Forecasts real estate/housing activity
Construction Spending tracks the total expenditure of construction work done on new structures or improvements to existing structures for private and public sectors each month in the United States. Building permits and construction spending lead to total housing market sales.
Housing Starts
- Forecasts residential real estate activity
Housing Starts track the number of new residential construction projects that have begun during any particular month.
Pending Home Sales
- Forecasts existing home sales
Consumer Confidence
- Forecasts consumer behavior
Consumer confidence is measured by the Michigan consumer sentiment Index (MCSI), which gauges consumer optimism or pessimism, usually predictive of future spending. The survey asks about their financial situation, how they view prospects for the general economy over the near term, and their view of the economy over the long term. Each monthly survey contains approximately 50 core questions, each of which tracks a different aspect of consumer attitudes and expectations. The samples for the Surveys of Consumers are statistically designed to be representative of all American households.
Jobless Claims
- Forecasts labor market stability
Jobless claims count the number of people filing for unemployment insurance benefits on a weekly basis. Jobless claims can be a predictor of unemployment.
Coincident Indicators
Coincident indicators track real time data, reflecting where the economy is.
Industrial Production
- Monitors business output
Industrial production tracks the level of economic productivity in the industrial sector of the economy by measuring the real output of manufacturing chemicals, food & drink, tobacco, machinery, metal products, computer electronic products, motor vehicles, mining, electric, and gas industries. Manufacturing is the most important sector for economic growth, accounting for 78 percent of total production.
Retail Sales
- Monitors business sales
Retail sales compare the aggregated sales of retail goods and services during a certain month to the same month a year ago.
Business Inventories
- Reflects supply and demand dynamics in business activities
Business Inventories in the United States measure the monthly percentage changes in inventories from manufacturers, retailers, and wholesalers.
Existing Home Sales
- Monitors final sales of existing homes
Existing Home Sales occur when the mortgages are closed. Mortgage closing usually takes place 30-60 days after closing the sales contract.New Home Sales
- Monitors new home sales
New home sales track the signing of a sales contract or acceptance of a deposit. Houses can be completed, under construction, or not yet started.
Housing Inventories
- Reflects supply & demand dynamics of housing
Housing Inventory refers to the number of single-family and condo units available for sale.
ADP Payrolls
Monitors private employment
The ADP National Employment Report measures levels of non-farm private employment. The Report is based on the actual payroll data from about 24 million employees processed by Automatic Data Processing, Inc.
Non-Farm Payrolls
- Monitors public employment
The non-farm payroll surveys about 141,000 businesses and government agencies, representing approximately 486,000 individual work sites, in order to provide detailed industry data on employment, hours, and earnings of workers on nonfarm payrolls.
Job Openings
- Monitors job openings
job openings refer to all positions that are open (not filled) on the last business day of the month.
Personal income
- Monitors consumer income
Personal Income refers to the income that persons receive for their provision of labor, land, and capital used in current production.
Personal Spending
- Monitors consumer spending/consumption
Personal consumer expenditure (PCE) is the primary measure of consumer spending on goods and services in the U.S. economy.
Lagging indicators
Lagging indicators reflect where the economy is coming from.
GDP growth rate
Confirms the growth rate of total spending
Click here for real-time chart
Gross Domestic Product (GDP) tracks the final sale of all goods and services. The growth rate tracks the rate at which GDP is growing or slowing. How GDP works
Unemployment
- Confirms labor force changes
The unemployment rate measures the number of people actively looking for a job as a percentage of the labor force.
Producer Price Inflation | YoY
- YoY confirms the inflation rate for producers from 1-year ago (lagging)
Year-over-year chart below👇🏽
Producer Price Index measures year-over-year changes in the price for commodities sold for personal consumption, capital investment, government, and export.
Producer Price Inflation | MoM
MoM confirms the inflation rate for producers from month to month, targeting real-time changes.Month-over-Month chart below👇🏽
Click here for real-time chart
Producer Price Index measures month-over-month changes in the price for commodities sold for personal consumption, capital investment, government, and export.
Consumer Price Index
- Confirms inflation rate for consumers
Consumer Price Index for All Urban Consumers is based on the prices of a market basket of food (14 percent of total weight), energy (9.3 percent), commodities less food and energy commodities (19.4 percent), and services less energy services (57.3 percent). The last category is divided by: shelter (32.1 percent), medical care services (5.8 percent) and transportation services (5.5 percent).
Gasoline prices
- Confirms changes in gas prices
Case Shiller Home Price Index
- Confirms changes in residential housing prices from major cities
The S&P Core Logic Case-Shiller 20-City Composite Home Price Index measures changes in residential house prices in 20 metropolitan regions in the United States: Atlanta, Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, New York, Phoenix, Portland, San Diego, San Francisco, Seattle, Tampa, and Washington D.C.