3 Crucial Economic Indicators
The overwhelming struggles of the global economy over the last couple years have been well documented, however many individuals are still struggling to understand the cyclical nature of the economy. Last week in an article titled, “Is the Economy in Uncharted Territory?” I outlined the business cycle and explained that we are currently in the recovery stage. In this article I will expand on the topic by explaining the 3 crucial economic indicators: leading, coincident, and lagging. These vital indicators will provide you valuable economical insight and will offer a roadmap to where the economy is going in the future.
Leading Indicators:
Leading economic indicators are the first to fluctuate as we will begin to see changes in these indicators prior to improvements in the global economy. The stock market and housing sector are great examples of leading economic indicators. These interest rate sensitive indicators tend to decline before the economy declines and also tend to improve before the economy recovers. Today the stock and housing markets continue to progress and at the moment it appears that both have formed sturdy foundations.
Coincident Indicators:
Coincident economic indicators tend to adjust after leading economic indicators, and simultaneously with the economy. The most commonly used coincident economic indicator is Gross Domestic Product (GDP). GDP is the monetary value of all the finished goods and services produced within a country’s borders during a specified time period (typically quarterly or annually). During the third quarter of 2009 GDP expanded for the first time since June 2008, at a better then expected rate of 3.5%. This broad measure of the economy shows that we have started to emerge from the recession.
Lagging Indicators:
Lagging economic indicators begin to change after the global economy and are the last indicators to show adjustments. It is not unusual to see lagging indicators trail the economy by one to three quarters. Most people do not really begin to “feel” that the economy is changing until after these lagging indicators start to make adjustments, because these indicators are easy for the typical individual to relate to. Contrary to popular belief, employment is a lagging economic indicator. Employment will show signs of progress after consumer confidence is revived, and the economy is well on its way to a recovery.
Courtesy of Economic Cycle Research Institute
The Chart Above illustrates the relationship between the Leading, Coincident, and Lagging Indicators since 1973. The shaded areas represent growth rate cycle downturns, while the horizontal dashes near the bottom mark off U.S. business cycle recessions. Recently the leading and coincident economic indicators have improved, which leads us to believe that the lagging economic indicators (i.e. employment) should recover in the months ahead.
As always, I look forward to hearing your opinions so feel free to add a comment in the section below. I will have a new article posted early next week. –Jim
The slumps in the financial and housing sectors of the economy will rebound and may already be rebounding. The scaries piece of the current recession is the amount of government interference. Cash for clunkers, artificially low interest rates and various tax credits have been propping up the auto and housing sectors but these programs have only encouraged people who were looking to make these purchases to make them now rather than later thus putting off what will be slowdowns in these sectors. Other sectors that will take a huge hit if the government executes its plans to intervene are the energy and health sectors. If either the health care bill, or the cap and trade bill passes you can expect a government-created recession that will be uncharted territory for the US.
Jim, I hope that you are right, but as I understand not all increases in the economic indicator lead to growth and not all decreases in the economic indicators lead to a recession (it can be seen in the chart provided on your site), what makes us certain that we are about to see a recovery? Other forms of predicting/forecasting are available but are also not definite.
Oddly enough some economists in July 2009 believed that the recession has ended, this could be due to; among other things, the result of noisy data /unrevised data being processed. They could be right but only time will tell.
It is a Global recession we are facing and a recovery in the USA is great news for all if it materialized, given the US role and the increasing high correlation between all international markets.
Finally; any good news now will help considering the fragile state of the global economy at the moment.
Hi Jim,
I’m concerned that the rapid increase in money supply, with no correlation to increased value or production vis-a-vis GDP, or otherwise will result in an extension of the continued lagging in both leading and coincident indicators. After reviewing the historical trends over the last 11 recessions since WWII, I predicted that unemployment would reach 12% before end of 4Q2009. If people continued to report/claim unemployment – we would already be close to the numbers…
How valid do you think stage 3 recovery is when money supply has yet to see its corresponding impact regarding inflation?
Further, the mandatory extension-workout periods on troubled mortgages expires this month (NOV), and all of the 5 year arms booked in 2004-2005 are beginning to expire. There is a very good chance that we will see another sag/deflation in home prices as more mortgagees default on their loans…
Also, in my humble opinion (IMHO), the ARRA and similar stimulus programs (Cash for Clunkers) are poorly conceived, ineptly implemented and seem to be stealing value/growth from the future.
In light of the above, isn’t it possible we’re looking at a much deeper dip in 2010 before real recovery gains traction?
Thanks for the insightful post.
Benjamin
@Abdulaziz Z. Mahasen
Thanks for the comment Abdulaziz! You make some valid arguments. Certainly leading indicators do not guarantee growth or declines in the future however; they do provide a very strong track record. It is also promising to see GDP growth over the 3rd quarter even if it can be strongly attributed to Government Spending (history shows that a kick start by the Government can help the economy get back on its own feet).
You brought up the point that we are in a global recession and that if the U.S. starts to strengthen this could help out the rest of the world. I believe the exact opposite is likely to happen. We are seeing stronger signs of recovery in International and Emerging Markets. This has stimulated U.S. exports which was another large factor in the 3rd Quarter GDP growth.
@Benjamin Goss
Benjamin thanks so much for the comment and the Retweet!
The increase in money supply has led to growth in GDP (GDP was declining at 6% earlier in the year and currently we are seeing growth at 3.5%). The net effect shows that the easing of money supply has had a positive effect on GDP; it just might not be as powerful as it has been in other recoveries.
The average American is de-leveraging (paying off debt and saving at high rates) this can make business cycles more volatile and will make for a less prosperous expansion, but an expansion none the less.
Housing appears to be on the mend and I do not see it having a negative effect on this recovery from here on out. Take a look at the leading home price index on the bottom of the page at http://www.businesscycle.com/resources/
This index projects that we have seen the worst for housing.
Jim – Thanks for the insightful and concise evaluation. Phi Alpha, DWP.
nice post. thanks.