This lesson discusses time-sensitive economic indicators, including leading, coincident, and lagging indicators.
Each gives us a different, yet interesting, view of the economy. Review examples of each to learn more, then take a brief quiz.
Economic Indicators Defined
Economic indicators are broad statistical measurements of activity that show how a large economy is operating. An indicator can be classified in several ways. This lesson discusses those distinguished by time.
These are either leading, coincident, or lagging.Each of these indicators provide us with a collage of what has happened, what is happening now, and what will happen. Although they do not always a give a perfect picture, each indicator provides an important piece of information. Let’s look at each indicator.
A leading indicator is a measurement that predicts economic activity that will occur in the future. These are things like:
- interest rates
- exchange rates
- price of gold
- price of oil
- stock market
- exchange rates
- inventory rates
- retail sales
- building permits
- unemployment rate
- business license applications
Leading economic indicators provide important economic information on what will happen in the economy based on what is happening with an indicator right now. For example, when the number of building permits is low, the housing market is slow.
The number of building permits is an indicator that the supply of houses is greater than demand.It also tells us that the price of housing needs to adjust downward. If you are in an industry that purchases properties and renovates them, it would be a good time to wait for the prices to adjust and then purchase property at a lower price. Ideally you hold on to the investments until the price of housing rises again.Leading indicators also guide the government in how to intervene in the economy to keep it stable and growing. For example, if the unemployment rate increases, the government can step in to stabilize the economy by increasing unemployment benefits, creating government contracts, and lowering interest rates. Manipulating these factors will provide short-term relief, create jobs, and provide incentives to borrowing, all of which will jump start the economy.
A coincident indicator is a measurement that shows the current state of the economy. These are things like:
- industrial production
- number of employees by sector
- personal income
- gross national product
Coincident economic indicators move along with the economy. They occur concurrently with the business cycle and are usually published monthly or even in real-time. For example, high personal income will occur while the economy is strong.
Because high personal income is a coincident indicator, we know that when personal income increases, the economy is growing. Economies that are dependent on vacationers will know it is time to invest in advertising to remind those with extra income that it is a good time to take a vacation.Coincident indicators also guide the government in how to intervene in the economy to keep it stable and growing. For example, when gross national product is expanding, the economy is growing. This is a sign that it is time for the government reduce unemployment benefits.
A lagging indicator is a measurement that occurs after an economic event. These are things like:
- consumer price index
- balance of trade
- duration of unemployment
- prime rate
- financial statements
Lagging economic indicators inform us of why something is happening now due to something that happened in the past.
They lag behind the pace of the economy. For example, farms tend to hire more seasonal workers during the summer. The unemployment rate in geographical areas that depend on fruits, vegetables, and grains is greatly affected by hiring, but this is a lagging indicator. Wages and labor hours increase first, and then businesses hire more workers.
It takes time for the unemployment rate to reflect the increase hiring.Lagging indicators also guide the government in how to intervene in the economy to keep it stable and growing. For example, the Social Security Administration gives an annual financial adjustment to Social Security recipients if there is a growth in inflation. When inflation is down for the previous year there is no cost of living increase given. The need for a cost of living increase in the current year is determined by a lagging indicator, inflation, from the previous year.
In order to be successful in business, we need to understand the information that the economy gives us so we can make knowledgeable decisions.
This lesson breaks down what leading, coincident, and lagging indicators are and provides examples of how they are used.Economic indicators tell us when and how to react to changes in the economy. They are important to businesses, consumers, industries, and the government.
It takes economic indicators to give us an understandable explanation of what is, was, and will be happening in the economy. These are some of the best forecasting tools we have in economics.