Economic indicators offer business owners insight into overall market demand. Published by various departments and agencies on a regular basis, economic indicators fall into three categories: leading indicators tend to change before economic changes do; lagging indicators confirm trends; and coincident indicators occur simultaneously with economic activity.
A midsized business executive who is looking to ensure their businesses’ sustainability in the long run should learn how to interpret what economic conditions may prevent him from making plans. Here are 10 signs to watch out for.
Inflation
Economic indicators are statistics released by government and nonprofit institutions to provide analysis about the economy. These numbers tend to reflect macroeconomic outcomes (gross domestic product [GDP], consumption, investment, international trade) and stability (budgets of central governments, prices, money supply and balance of payments).
Inflation is one of the main dangers for private investment. With rising inflation, consumer purchasing power diminishes and products and services become more expensive for consumers to consume. Large up-front capital-intensive firms such as manufacturing and infrastructure companies have high risk of inflationary pressures.
Leading indicators deliver warning signals about upcoming changes in the economy, while coincident indicators assess trending in real time as they develop. Lagging indicators offer an examination of the past for economic developments in order to validate trends. In addition, many economic indicators are released on release schedules so that researchers can schedule analyses in advance; for example, Institute of Supply Management publishes its monthly survey findings the first day of the month.
Interest Rates
Economic indicators have been extremely helpful in identifying the global economy and forecasting the future. There are three types of economic indicators: leading, coincident and lagging indicators. Leading indicators, such as new orders of producers or consumer expectations indexes, give us a tip of the iceberg of potential economic transformation; tail indicators, such as gross domestic product or unemployment, are retrograde interpretations of past developments.
An economic marker might be something like weekly hours of production, for example, that can be a leading measure of worker dynamics in the sense of cutting overtime before hiring or increasing it before rehiring. The other leading indicators, such as Conference Board’s Leading Economic Indicators Index (the measure of economic growth six to nine months into the future) can also serve as leading indicators. Although reports from most economic indicators are regularly published, which gives investors a good head start on preparation, their value rests on the reliability and interpretation of the reports released by these indicators.
Employment
Economic indicators are numbers that describe the measurement of different parts of an economy. They’re generally gathered and released monthly or quarterly by departments and agencies and used as market moving information. They can influence investment decisions made by investors. Economic indicators are classified as leading indicators whose trends are in advance; lagged indicators that confirm such trends; and coincident indicators, which follow with economic changes.
As a matter of fact, leading indicators are what investors use most of the time to determine where the economy is headed. Durable goods orders can mean that consumers are ordering more durable goods such as refrigerators and cars.
Durable goods orders that decrease suggest consumer spending is diminishing, while leading indicators such as the Institute for Supply Management’s PMI report and new orders from wholesalers can provide insight.
Consumer Confidence
Consumer confidence is a key component of economic wellness, representing the vast majority of a country’s gross domestic product and spurring growth. Measures such as the University of Michigan’s Consumer Sentiment Index or the Conference Board’s Consumer Confidence Index (CCI) ask consumers how they’re doing, their 6 month economic prospects and their spending plans – confidence is a key driver of consumption spending and economic growth.
But once consumers start feeling down about their finances, they might save more than they spend, which depresses growth. Analysts follow consumer confidence surveys for direction of trend. If it drops, the market will expect consumers reducing spending at retailers, mortgage requests and credit cards until it reduces business investment with implications in the economy across the board. It is thus important for savvy investors to stay abreast of economic data in order to sustain growth.
