There’s no shortage of important reports in financial markets. Wall Street analysts and macro forecasters have so many data points from which to choose to gauge the health of the global economy. 

In general, economic indicators are broken down into three categories: leading, lagging, and coincident. Each group might tell a different story about such areas as the jobs market, industrial production, retail sales, inflation, and overall sentiment. You can become a more informed and savvier investor by understanding how all these statistics fit within the economic landscape.

What Is an Economic Indicator?

Any data point – big or small – that describes the health of an economy is considered an indicator. It can be something as pivotal as the monthly employment report put out by the U.S. Bureau of Labor Statistics (BLS) or a niche detail like an export number of a small emerging-market nation. 

Policymakers, academics, investors, and think tanks all value economic indicators. For investors, digesting and interpreting the dozens upon dozens of macroeconomic reports released each month and quarter goes a long way toward forming what’s known as a “top-down” way of managing a portfolio. That means using macro data first, then working down to the sector, industry, then company level in an analysis. 

Who Puts Out Economic Data? What Are the Major Reports?

In the U.S., the BLS, Bureau of Economic Analysis (BEA), and Census Bureau are some of the major entities that gather and release economic figures. Some of the most common reports published include the monthly employment situation, Consumer Price Index (CPI) and Producer Price index (PPI), Retail Sales, Industrial Production, ISM Manufacturing and Services, Money Supply, Personal Income and Spending data, Imports and Exports, New and Existing Home Sales, and Consumer Confidence surveys.

High-Frequency Economic Indicators

While data collected and put out by states and the federal government is generally considered reliable, an emerging trend of high-frequency data gathered and published by private companies has become useful for active investors. During the COVID-19 pandemic, for instance, activity measurements were taken using data such as company badge swipes at offices, OpenTable restaurant bookings, TSA throughput volumes, and hotel occupancy rates.

Why Economic Indicators Matter

The name of the game, if you are an investor, is to see where the proverbial puck is going. Macro and micro data points are useful in that process. Indicators, which measure how well or poorly one slice of the economy performs over a given period, help traders form a mosaic and then spot potential trends before they become well known. 

Think of it like this – if you can develop a program to identify patterns using a handful of economic data, you might be able to allocate your portfolio to take advantage of, say, improving consumer spending trends heading into the holidays. On the flip side, if the breadcrumbs of a weakening economy are identified early, then turning more defensive with your asset allocation might lead to better returns.

It’s tough to beat the market, though. All market participants have access to the same information. Still, having a solid beat on what part of the economic cycle we are in helps you become a more aware consumer, and might even help you if you are considering a job change. 

It is important to recognize that all these data points and vast reports are not without possible flaws. There’s no perfect indicator, and backward-looking data gets revised all the time. Even the National Bureau of Economic Research (NBER) usually waits months, maybe more than a year, before determining when a recession has taken place. 

Types of Economic Indicators: Leading, Lagging, and Coincident

Economists break down indicators into three broad buckets: leading, lagging, and coincident. Each category helps paint a different picture. Taken together, though, market participants, and even everyday investors, can get a ballpark gauge of where the economy stands and what might lie ahead.

Leading Indicators

Wouldn’t it be great if we had access to future economic data? Navigating challenging markets and asset-class dynamics would be so much easier! Alas, the best we can do is tally up and dissect leading economic indicators. A leading indicator measures conditions to anticipate trends and inflections in the economic cycle. 

Common leading indicators are stock prices, initial jobless claims, manufacturers’ new orders for consumer goods and materials, PMI reports, building permits for new private housing units, the money supply (M2), and yield curve spreads.

Among the three categories of economic indicators, leading data is typically the most important since it offers hints about the future. There is even a Leading Economic Index (LEI) report published each month by The Conference Board, a global nonprofit think tank. The LEI is designed to signal peaks and troughs in the business cycle across economies. Like so many reports, it is not without its flaws – the LEI can go for months suggesting the economy will turn one way or another, while all official data goes a whole other direction.

Lagging Indicators

Some of the most well-known snapshots of the economic environment are considered lagging indicators. Monthly CPI and PPI, some unemployment data, unit labor costs, lending rates, commercial loan default trends, and even housing price statistics are backward-looking and provide few guideposts for whether a boom, bust, or normal growth pattern is about to take shape. 

For you and me, it’s critical not to get too bent out of shape or excited about lagging indicators. The financial media might make a big deal out of a CPI report, for example, but always remember that it’s looking back in time. There might be leading indicators that portend vastly different economic conditions. 

Coincident Indicators

Arguably the biggest economic barometer out there is the monthly jobs report. The Establishment and Household employment surveys, taken together, provide the most comprehensive assessment of the state of the labor market. The number of employees on payrolls usually shifts in line with how the broad economy is performing. Moreover, personal income and spending trends also ebb and flow in real time with GDP growth changes. At the wholesale level, the Industrial Production report, a pulse check on the manufacturing sector, is considered a coincident indicator. 

Coincident indicators might hit home since the data put out by folks in Washington D.C. and analyzed by Wall Street professionals usually jibe well with trends on Main Street, USA. 

How to Use Economic Indicators

The tricky thing about most economic indicators, even those of the leading variety, is that they can suggest times are great right before stock prices turn south. Likewise, it’s often darkest before the dawn when it comes to how aggregate data appear right as a new bull market gets underway. 

Case Study: The Great Recession

For instance, the economy appeared generally on track during the middle of 2007, right before the Great Recession. Inflation was a bit high, but the unemployment rate was low and retail sales data were fine. Sure, the housing market showed signs of fragility, and hiccups in consumer loan defaults told a cautionary tale, but most leading indicators were not flashing major warning signals – except for one.

The yield curve turned inverted early in 2006, a telltale sign of a looming recession. It was not until late 2007 when the economic downturn began. Stock prices, another leading indicator, topped in October ‘07 - just two months before the business cycle peak, according to the NBER.

Jump ahead to early 2009 – the buying opportunity of a lifetime in the stock market – and things appeared grim on both Wall Street and Main Street. The S&P 500 was down more than 50% from its all-time high and the unemployment rate had surged to 8.1%. Released on the penultimate trading day of the bear market, March 6, 2009, the employment report for the previous month revealed that more than 650k jobs had just been slashed. It wasn’t until the following October when the jobless rate peaked at 10%.

Forward Thinking

The key thing to remember with all economic data – leading, lagging, and coincident – is that the economy is not the stock market. It surely helps to check the temperature of the macro landscape, but the best investors are always scanning for what may come next – just as a safe driver spends more time monitoring the road ahead, not what’s happening in the rearview mirror.

The Bottom Line

Economic indicators provide so much useful information for professional analysts building complex models and regular investors just trying to save for retirement. Having a basic understanding of how all the data points fit into the bigger economic puzzle should be your goal. Putting leading, lagging, and coincident indicators in the proper context can help you become a smarter investor.