Leading indicators are measures of economic activity that give a preview of the economy’s future direction. Government agencies and non-governmental organizations release these data, which are closely watched by investors and policy makers. Leading indicators on the overall economy, inflation, unemployment and other measures help drive investment decisions and economic policy.
Central banks such as the Federal Reserve in the United States pay close attention to leading economic indicators, as they decide what to do with interest rates and other tools of monetary policy. For these reasons, leading economic indicators are important to investors on Wall Street and around the world. Leading investment houses and banks watch the indicators, hoping they will provide some signal about the state of the economy and where it is headed.
Some of the leading economic indicators include the Gross Domestic Product (GDP), measures of inflation, unemployment rates, retail sales index, consumer confidence index, and the Conference Board index of leading indicators.
Gross Domestic Product
GDP is the broadest single measure of the overall state of the economy. In the U.S., the federal Bureau of Economic Analysis reports GDP on a quarterly basis, with each measure reflecting the previous quarter. The most significant figure is the growth rate. In general, GDP in the U.S. grows at an annual rate of around 3 percent. A higher growth rate may signal inflation and lead to higher interest rates from the Fed, while a lower rate may signal a slowdown in the economy, which could raise unemployment and reduce consumer spending.
Two measures of inflation are the Consumer Price Index (CPI) and Producer Price Index (PPI). The U.S. Bureau of Labor Statistics releases both indexes monthly. The CPI is the most important inflation indicator and measures the change in price of a bundle of consumer goods and services. It also is important to consider the CPI core rate, which gives a better reading of true inflation by excluding the volatile food and energy sectors.
The Producer Price Index (PPI) helps gauge inflation by measuring the price of wholesale goods. These include raw materials, intermediate goods used to produce other products and finished goods. Higher wholesale prices raise production costs, resulting in higher retail prices.
The Bureau of Labor Statistics releases a monthly unemployment report that includes the unemployment rate, the number of new jobs created, average hours worked per week and the average hourly wage.
Leading indicators of consumer activity include the Retail Sales Index and the Consumer Confidence Index. The Retail Sales Index, released monthly by the U.S. Census Bureau, measures retail sales by studying a sample of U.S. retail stores.
The Consumer Confidence Index, released monthly by the Conference Board, a non-governmental organization, surveys a sample of consumers about their feelings regarding the state of the economy. Many analysts think high consumer confidence can lead to an economic recovery, even when other data suggest a sluggish economy.
Conference Board Index
The Conference Board releases its Index of Leading Indicators every month. The index consists of 10 measures: average work week in manufacturing, average number of applications for unemployment, manufacturers’ orders for consumer goods, manufacturers’ orders for capital goods, speed of delivery of goods from suppliers, housing permits, the Standard and Poor’s 500 Stock Index, the inflation-adjusted money supply, consumer expectations and the spread between short- and long-term interest rates.