As we finish our 3-part series on metrics, if you haven’t read Part 1, Lagging Indicators, or Part 2, Coincidence Indicators, click on the hyperlinks to read to get caught up.
The conclusion of the quest is near…
As we continue our quest, we’ve finally reached the final and last part of the series. By now, the hero of our story has navigated their way through a plethora of challenges until finally reaching the Summit (no pun intended, well maybe). Upon reaching the highest point and completing every math equation along the journey, our hero only has one last set of metrics to understand before completing this quest for statistical knowledge. BRING ON THE LEADING INDICATORS!
Leading Indicators
Leading indicators, as predicted, are selected due to their potency in predicting economic activity.
These include:
· Average work week, production workers, manufacturing
· Average weekly initial claims for unemployment insurance
· Manufacturer’s new orders for consumer goods and materials
· ISM new orders index
· Manufactures’ new orders for nondefense capital goods, excluding aircraft
· Monthly building permits for new private housing
· Stock prices
· Leading credit index, M2 money supply prior to 1990
· Interest rate spread between 10-year treasury bond and federal funds rate
· Average consumer expectations for economic conditions
A common theme that can be extracted from the list above should be pretty evident from their names. New ‘orders’ or ‘expectations’ look at possible future purchases. These forward-looking metrics provide an outlook of those opportunities that are near-term wins in the pipeline. Some specific components of these measures and definitions may not be obvious, which we’ll hop into next.
Keep in mind that the list of indicators may change in the future. Indicators have historically been replaced as the market changes to reflect appropriate reporting and needs.
Leading Indicator specifics
Average weekly hours worked, production workers, manufacturing
A key point in this metric that may not be obvious is productivity. Assuming the number of employees, hours worked, and productivity rate remains the same, the output should remain the same. Any changes in those variables could impact output and future orders. Also, when manufacturers project demand decreasing, they tend to reduce workers' hours before downsizing.
Average weekly claims for unemployment
To track this metric, follow President and Chief Investment Officer John-Mark Young’s weekly market update. He discusses current activities in detail and provides great insight.
ISM new orders index
This survey is aggregated with responses from ~300 purchasing managers nationwide. ‘New orders’ should be self-explanatory, thus the focus on measuring demand. For this metric, remember the number 50. If these metrics report 50% or greater, this indicates increased order growth and is usually a sign of robust economic activity. If less than 50%, this suggests a contracting pace of demand in the economy.
Stock prices
This metric is measured as the monthly average for the S&P 500. Some economists question its inclusion since it does not reflect economic fundamentals and should not be considered as a gauge of future economic activity.
Leading credit index, M2 money supply prior to 1990
This metric measures money circulation and deposits in savings, checking, CD, money market, and other liquid assets. M1, M2, and M3 are all types of monetary aggregates. The Federal Reserve recognizes these; however, the leading economic index only uses the M2.
Average consumer expectations for economic conditions
This survey conducted by the University of Michigan Survey Research Center focuses on obtaining responses from consumers about their financial situation, spending trends, overall economic/financial situation, and some current issues/concerns.
Fin.
Thank you for joining me on this quest to conquer economic indicators and indices. It’s been a wild ride full of calculations, definitions, and aggregations (bonus points for anyone who can tell me how many times I used ‘aggregate’ in the last three posts!)
On this journey, we’ve built a foundational understanding of economic indicators, specifically looking at historical, near-real-time, and forecasting metrics. Both lagging and coincident indicators provide valuable information; however, both have improved value when the individual categories are aggregated as indices. Likewise, the leading indicator index (LEI) aggregates the list of leading indicators to provide a single data source.
Remember, never depend on one metric or index to make financial decisions. Consider speaking with one of our financial advisors at Whitaker-Myers Wealth Managers to review the holistic picture of market activities and your portfolio. Or schedule time to learn more about the data. We all enjoy a good, nerdy data session!