What Are Leading Economic Indicators? Why Should I Care?
Leading economic indicators are metrics that allow us to estimate the future performance of the economy. However, as investors, there is an ongoing debate over which indicators are the most helpful or whether some serve much purpose at all. In fact, the stock market itself is a leading economic indicator – so it’s questionable whether (for investing strategy purposes) there is any use in monitoring such metrics. Regardless, many like to believe that if leading economic indicators are positive then the stock market will continue to perform well and provide a healthy return on investment for months, possibly years, to come.
The following are just a few of the more popular leading indicators that economists, investors, and the media tend to monitor on an ongoing basis:
# 1 The Institute of Supply Management (ISM) Manufacturing Index
The ISM Mfg. Index is one of the more popular manufacturing reports that surveys 300 firms across the country. While the index covers multiple statistics, most are focused on what the purchasing managers of these companies are reporting. In particular, whether they are ramping up or scaling back on purchases of inputs to match demand. Ramping up means they are expecting increased demand which tends to create more corporate profits. At the same time, increased demand could negatively affect current bond prices because of the possibility of an increase in inflation.
When viewing the ISM Mfg. Index, a score below 43 indicates that the economy is in a recession, a score above 50 indicates an economic expansion, and a score in between reflects that the US economy is growing, but the manufacturing sector is contracting. The most recent report (8/1/17) shows ISM Mfg. Index at 56.3.
Other widely monitored manufacturing reports are the PMI Mfg. Index, Industrial Production, Empire State Mfg. Survey, and the Philadelphia Fed Business Survey Outlook.
# 2 Employment Situation Report
Unlike the Manufacturing Reports, the Employment Situation Report shows the current state as well as the future direction of the economy. The report tracks how many people are looking for jobs, how many actually have jobs, wages, and hours worked. The report also breaks down non-farm payrolls by sector, which can provide insight into how certain types of business are doing compared to others.
The most recent report shows unemployment at 4.3%, non-farm payroll increasing month over month by 209,000, participation rate at 62.9%, and wages increasing by .3% month over month, 2.5% year over year. For more employment statistics, check out the Jobless Claims report.
# 3 Housing Starts
Increasing housing starts has a huge ripple effect on the economy. Construction requires the hiring of construction workers and related jobs, which injects more money into the hands of consumers and increases overall spending. Banks also benefit on a commercial and retail level because the builders often need capital to build the homes and consumers needs loans to buy the new homes. Future home buyers then need to furnish their home which leads to more, and often large, retail sales. The end result is an overall increase in corporate profits.
The July report (released 8/16/17) shows month over month starts declining from 1.213 million to 1.155 and permits also down slightly from 1.254 million to 1.223. While June was a particularly good month, the more recent weakness in combination with March and April’s numbers show what may be emerging as a downward trend in the housing sector.
As you can see, leading economic indicators provide valuable insight on the future of the US economy. Interpretations may vary, but overall the economy still shows positive signs of growth despite the occasional weak data.
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