Leading, Lagging and Coincident indicators confirm what is happening in our economy. Add to your investment knowledge by learning what they mean. Successful investors are good at processing information. They can relate numbers and statistics to stock and bond prices. Among the most important numbers are the various economic indicators published by the government. These numbers help explain where interest rates – the mother of all stock movers – are going. Here is a rundown of what those indicators are saying.
There are three types of economic indicators: Leading, Lagging, and Coincident. There are three types of economic indicators: leading, coincident, and lagging. Leading indicators are designed to predict future economic conditions. They include the number of building permits issued and the unemployment rate.
Coincident indicators are measures of current economic conditions. They include things like the GDP and consumer spending. Lagging indicators are measures of past economic conditions. They have something like the amount of money in circulation and the level of debt.
Leading indicators help to predict what the economy will do in the future. Therefore, leading indicators are often the most useful for an investor. An example of a leading indicator would be hours worked per employee. If the hours are rising, firms should increase hiring at some point in the future.
Lagging indicators confirm what leading indicators predict. Sagging numbers change a few months after the economy does. For example, the unemployment rate is a lagging indicator. Generally, the unemployment rate will fall after a few months of economic growth. Likewise, if the leading indicator of hours worked increases, the lagging hand of unemployment should fall after a few months.
Coincident indicators mirror what the data is saying. Coincident indicators are generally what is happening right now, for example, the jobs report. So if a leading indicator is predicting future job gains, a lagging hand is saying unemployment is falling, and a coincident indicator will tell you the current employment number.
How the Federal Reserve interprets, all this data is a mystery to everybody but the fed governors. Some economists think the fed is a lagging indicator institution, while others believe it mostly watches leading indicators. One clue could be the beige book.
The beige book is many economic data, such as housing starts and construction activity; the Fed publishes that. The Fed releases the beige book eight times a year before deciding on interest rates. The public has a chance to read over the report and predict what the controller of rates has in store.