Economic Indicators

To analyze the health and overall direction of the economy, investors generally rely on a variety of key metrics known as economic indicators. These indicators serve as barometers that reflect different phases of the business cycle and help identify whether the economy is expanding, contracting, or remaining stable. Broadly, these indicators fall into three categories: leading, coincident, and lagging. They are compiled and published monthly by The Conference Board, a respected nonprofit research organization. Each category provides unique insights and functions in a different temporal relationship with the business cycle.

Leading Indicators

Leading indicators are forward-looking data points that tend to shift direction before the economy itself begins to change. Because of this anticipatory quality, they are closely monitored by economists and policymakers to forecast economic performance roughly four to six months in advance. When these indicators rise, it generally suggests an upcoming expansion in economic activity, while a decline could point to an approaching recession. Some of the most notable leading indicators include:

  • Money Supply: An increase in the money supply typically signals that consumers and businesses will have more funds to spend or invest, which may fuel economic growth. Conversely, a shrinking money supply may indicate tightening financial conditions.

  • Building Permits (Housing Starts): Applications for new housing construction often increase when the economy is expected to grow, as builders anticipate stronger demand. A decline in building permits, on the other hand, may reflect caution or a slowdown in the housing market.

  • Average Weekly Initial Claims for Unemployment Insurance: This figure reflects new claims for unemployment benefits. Rising claims suggest weakening employment conditions and can be an early warning sign of economic trouble, while declining claims imply strengthening labor markets.

  • Average Weekly Working Hours (Manufacturing): Changes in manufacturing work hours are an early response to shifts in demand. Longer hours typically suggest that businesses expect continued growth and need more output, while shorter hours can signal slowing demand.

  • Manufacturers' New Orders for Consumer Goods: This data reveals business expectations about future consumer demand. More orders imply optimism and projected growth; fewer orders suggest reduced expectations for consumer spending.

  • Manufacturers' New Orders for Nondefense Capital Goods: These orders reflect investment in equipment and infrastructure, indicating how confident businesses are in future economic prospects.

  • Index of Supplier Deliveries (Vendor Performance): This measures how quickly suppliers can deliver goods. Slower deliveries may signal strong demand and strained supply chains—typically a sign of economic expansion—whereas faster deliveries may indicate weak demand.

  • Interest Rate Spread Between 10-Year Treasury Bonds and the Federal Funds Rate: This spread, often called the yield curve, tends to steepen when growth is expected. An inverted yield curve—when short-term rates exceed long-term ones—is a well-known predictor of recession.

  • Stock Prices (e.g., S&P 500): Equities often move ahead of the actual economy because investors base decisions on future expectations. Rising stock prices generally reflect confidence in economic growth, while declining markets may suggest anticipated weakness.

  • Index of Consumer Expectations: Compiled from surveys, this index reveals how consumers feel about future economic conditions. Positive sentiment typically precedes greater spending, whereas pessimism can lead to reduced consumption.

Note that not all leading indicators move uniformly. A reliable forecast comes from observing broad-based movements: if the majority are trending upward, it implies growth ahead; if most are falling, it may signal a downturn or recession. Additionally, persistent positive changes can foreshadow inflationary pressure as spending, production, and employment rise.

Coincident Indicators

Coincident indicators reflect the current state of the economy and move in step with real-time economic activity. These indicators are useful for confirming the present phase of the business cycle, especially in gauging whether the economy is expanding or contracting at any given moment. Key coincident indicators include:

  • Nonagricultural Employment: This is a broad measure of job creation excluding farming, which tends to be more seasonal and less sensitive to macroeconomic trends. Employment levels rise during expansions and fall during contractions.

  • Personal Income Minus Transfer Payments: This indicator isolates income earned from productive economic activity, excluding government benefits like Social Security or welfare. Rising earned income reflects growing economic participation and output.

  • Industrial Production: This encompasses the total output of factories, mines, and utilities. As businesses increase or decrease production, this metric moves in parallel with the business cycle.

  • Manufacturing and Trade Sales (in Constant Dollars): Adjusted for inflation, this measure captures real spending and business activity. Higher sales figures generally suggest strong economic momentum.

Coincident indicators help confirm what the leading indicators may have predicted. For instance, if leading indicators pointed to growth and coincident indicators begin to rise accordingly, it validates that the expansion is indeed underway.

Lagging Indicators

Lagging indicators follow the movement of the economy and tend to shift direction several months after a trend has already taken hold. Their value lies in confirming the strength and sustainability of trends—whether an expansion is robust or a recession is deepening. Because they change more slowly, they help analysts distinguish genuine long-term shifts from short-term fluctuations. Key lagging indicators include:

  • Average Duration of Unemployment: This shows how long, on average, people remain unemployed. Even if the economy begins to recover, this figure may remain elevated until hiring picks up meaningfully.

  • Ratio of Consumer Installment Credit to Personal Income: This gauges how much consumers rely on credit relative to their income. Rising ratios could signal that consumers are overleveraged, which may eventually restrain spending.

  • Ratio of Manufacturing and Trade Inventories to Sales: High inventory-to-sales ratios suggest businesses are overstocked due to slowing sales, a sign that economic activity may have already cooled.

  • Average Prime Rate: This is the interest rate that commercial banks charge their most creditworthy clients. It often lags changes in the federal funds rate and can confirm prior monetary policy shifts.

  • Change in the Consumer Price Index (CPI) for Services: Since service prices adjust more slowly than goods, changes in this subset of inflation tend to trail broader economic movements.

  • Total Amount of Commercial and Industrial Loans Outstanding: This reflects borrowing activity among businesses. A rise in outstanding loans typically follows increased investment or expansion that began earlier in the cycle.

  • Change in Index of Labor Cost per Unit of Output (Manufacturing): Rising labor costs relative to output indicate inflationary pressures and are usually observed after an economic trend has developed.

While lagging indicators are not predictive, they are vital for validating and analyzing economic conditions after the fact. They also help determine whether policy responses—such as interest rate changes—are having the intended effect.

Here is the list of all the economic indicators with quick real historical examples so that you get fully and thoroughly understand them.

Leading Indicators – Predicting the Economic Path

1. Money Supply (M2)

  • Simple Example: Imagine the government injects more money into the economy via stimulus. Households have more cash, spending increases, and businesses gear up production.

  • Historical Case: In 2020, massive monetary stimulus led to a spike in M2, which preceded the 2021 inflation surge.

  • Takeaway: Surging money supply often foreshadows rising demand or inflation, but its predictive power depends on whether the money is actually spent (velocity matters).

2. Building Permits / Housing Starts

  • Simple Example: A large developer filing new permits suggests confidence in future housing demand. If permits plunge, they expect slower growth.

  • Historical Case: In 2005–2006, housing starts began to fall dramatically—well before the 2008 financial crisis hit.

  • Takeaway: A downturn in building permits typically signals economic slowing 6–12 months ahead.

3. Initial Unemployment Claims

  • Simple Example: A car factory lays off workers—these workers file claims. An increase in weekly claims indicates weakening job conditions.

  • Historical Case: March 2020 saw an unprecedented jump in claims (from ~200k to 3 million in one week), a clear signal of economic collapse before GDP data arrived.

  • Takeaway: This is among the most immediate indicators of labor market stress.

4. Average Weekly Hours (Manufacturing)

  • Simple Example: A furniture factory cuts workers' hours from 42 to 36 per week—this often precedes layoffs and reflects softening demand.

  • Historical Case: In 2007, weekly hours began to fall before recession hit, a subtle but telling signal.

  • Takeaway: Firms reduce hours before cutting jobs, making this a quiet but powerful early indicator.

5. Manufacturers’ New Orders (Consumer Goods)

  • Simple Example: A spike in orders for electronics suggests strong future demand; a fall means retailers expect weaker sales.

  • Historical Case: In early 2001, new orders declined before the dot-com bubble burst and recession took hold.

  • Takeaway: Orders anticipate future output—especially durable goods.

6. Manufacturers’ New Orders (Capital Goods Excluding Defense)

  • Simple Example: A company orders expensive machine tools to expand capacity—showing confidence in long-term growth.

  • Historical Case: Prior to the 2008 crisis, capital goods orders began trending down in mid-2007.

  • Takeaway: Business investment behavior can forecast recessions or recoveries.

7. Index of Supplier Deliveries (Vendor Performance)

  • Simple Example: Slower deliveries suggest high demand and strained supply chains. Faster deliveries imply slack demand.

  • Historical Case: In late 2021, widespread delivery delays reflected overheating supply chains and inflationary pressure.

  • Takeaway: Longer delivery times may paradoxically signal strong demand in the short term.

8. Interest Rate Spread (10-Year Treasury vs. Fed Funds Rate)

  • Simple Example: A flatter or inverted yield curve (short-term rates higher than long-term) signals investor pessimism.

  • Historical Case: Yield curve inverted in 2006; recession began December 2007. The 2022–2024 inversion is one of the longest in U.S. history.

  • Takeaway: One of the most reliable recession signals, especially when sustained.

9. Stock Prices (e.g., S&P 500)

  • Simple Example: If stocks broadly fall over several months, investors may expect lower corporate earnings and economic slowing.

  • Historical Case: In late 2018, stocks sold off; GDP growth slowed early in 2019.

  • Takeaway: Stocks often move before real economic data; noisy but directionally useful.

10. Index of Consumer Expectations

  • Simple Example: Surveys show consumers expect worse financial conditions—people pull back spending.

  • Historical Case: In early 2022, consumer sentiment plunged due to inflation fears—spending weakened by year-end.

  • Takeaway: Dips in confidence usually lead to reduced consumption.

11. ISM New Orders Index (Manufacturing)

  • Simple Example: A reading below 50 signals contraction in new orders, likely followed by production cuts.

  • Historical Case: In mid-2019, the ISM New Orders Index dipped below 50 before manufacturing activity slowed.

  • Takeaway: Leading gauge of manufacturing cycle.

Coincident Indicators – Reflecting the Current State

Coincident indicators move at the same time as the economy. They confirm what is happening in real time.

12. Nonfarm Payroll Employment

  • Simple Example: If employers add jobs steadily, the economy is likely expanding.

  • Historical Case: In April 2020, the U.S. lost over 20 million jobs—a clear sign of collapse.

  • Takeaway: Among the most watched real-time health indicators.

13. Personal Income (Excluding Transfer Payments)

  • Simple Example: A rise in earned income means more spending potential. A drop suggests falling productivity or wages.

  • Historical Case: In 2009, earned income fell even as unemployment benefits increased, masking deeper weakness.

  • Takeaway: Shows actual productive income, not government support.

14. Industrial Production

  • Simple Example: More output in factories means rising demand. A decline signals reduced consumer or business demand.

  • Historical Case: Output plummeted 15% in early 2020, then staged a slow recovery.

  • Takeaway: Tracks real goods production across multiple sectors.

15. Real Manufacturing and Trade Sales

  • Simple Example: Higher adjusted sales show strong demand. A drop suggests economic contraction.

  • Historical Case: These sales contracted sharply in mid-2008 and early 2020 during the Great Recession and COVID.

  • Takeaway: Validates what’s happening on the ground across producers and retailers.

Lagging Indicators – Confirming the Trend

Lagging indicators move after the economy has changed. They help confirm the direction and depth of trends.

16. Average Duration of Unemployment

  • Simple Example: If job seekers take longer to find work, recovery may be weak.

  • Historical Case: After the 2008 recession, average duration of unemployment stayed elevated for years despite growth.

  • Takeaway: Confirms labor market damage after a downturn.

17. Ratio of Consumer Installment Credit to Income

  • Simple Example: Consumers take on more credit than they can repay—eventually curtailing spending.

  • Historical Case: This ratio ballooned in the mid-2000s prior to the housing crash.

  • Takeaway: High debt burdens eventually restrain growth.

18. Inventory-to-Sales Ratio

  • Simple Example: Retailers sit on unsold inventory—suggesting weak demand.

  • Historical Case: This ratio rose sharply in 2001 and 2008, before layoffs followed.

  • Takeaway: Excess inventory often leads to production cuts.

19. Average Prime Rate

  • Simple Example: High prime rates persist after inflation peaks, slowing borrowing and confirming a tight-money environment.

  • Historical Case: In 1981–82, the prime rate remained above 15% even as inflation began to drop.

  • Takeaway: Tracks the lasting impact of monetary policy.

20. Change in CPI for Services

  • Simple Example: Even if goods prices fall, rising rent or health care costs can keep CPI elevated.

  • Historical Case: In 2023, service inflation remained sticky even as gas and goods prices cooled.

  • Takeaway: Indicates long-term embedded inflation.

21. Commercial and Industrial Loans Outstanding

  • Simple Example: A rise suggests businesses are expanding—but usually after a recovery is well underway.

  • Historical Case: After 2009, loans picked up slowly, confirming businesses’ delayed return to investment.

  • Takeaway: Useful for tracking late-stage recovery or momentum.

22. Labor Cost per Unit of Output

  • Simple Example: Wages rise faster than productivity—profits shrink, and inflation rises.

  • Historical Case: Late in the 1970s, unit labor costs soared, contributing to stagflation.

  • Takeaway: Confirms inflationary wage pressures.