Economic Indicator

What Is an Economic Indicator?

An economic indicator is a piece of data that describes some part of the economy, such as jobs, production, prices, or spending. Governments, central banks, and private research groups publish these figures on a regular schedule. Investors watch them because they offer clues about whether the economy is growing, slowing, or heading into a recession, and those conditions affect corporate earnings, interest rates, and the prices of stocks and bonds.

The Main Types

Economists usually group indicators by when they tend to change relative to the broader economy:

• Leading indicators tend to shift before the economy does. Examples include new orders for manufactured goods and building permits.
• Coincident indicators move roughly in step with the economy. Examples include employment levels and industrial output.
• Lagging indicators tend to change after the economy has already turned. Examples include unemployment duration and the level of inflation over recent months.

Some indicators are also described as having a consumer price index style of measurement, while others, such as gross domestic product, summarize total output over a set period.

How Investors Use Them

Indicators are most useful when compared with expectations. Markets often react less to the raw number than to how far it differs from what analysts forecast. A jobs report that comes in stronger than expected may push interest rates higher, which can lower the value of existing bonds and weigh on certain stocks. A weaker report may have the opposite effect.

Indicators also work best in combination. A single data point can be revised, distorted by seasonal patterns, or temporarily affected by weather or strikes. Looking at several related measures over time gives a clearer picture than any one release.

Limitations

Indicators are estimates, not exact measurements, and many are revised after their first release. They also describe the past or present, so they can only suggest what comes next. Economic indicators are educational tools for understanding conditions, and they do not guarantee any particular market outcome.