almost 2 years ago

    Economic Indicators: Leading, Lagging & Coincident  cover image

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    Economic Indicators: Leading, Lagging & Coincident

    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
    Markets are sensitive to economic changes
    • 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 
    The Institute of supply chain management's (ISM) Purchasing Managers Index (PMI is likely the most accurate leading indicator of future economic growth as it tracks the business activity in the largest supply chains from top to bottom line: New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers' Inventories, Employment, and Prices. Above 50 the economy is expanding, below 50 the economy is contracting.

    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
    ​Building Permits track approvals given by a local jurisdiction before the construction of a new or existing building can legally start. 
    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
    The Pending Home Sales Index, a leading indicator of housing activity, measures housing contract activity and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. When a seller accepts a sales contract on a property, it is recorded into a Multiple Listing Service (MLS) as a "pending home sale." The majority of pending home sales become home sale transactions, typically one to two months later.

    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
    (Click here for real time chart)
    ​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

    • 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
    Click here for real-time chart
    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
    Click here for real time chart
    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.