We’re going to be talking about economic indicators today and more specifically on leading economic indicators. Economic indicators give us an idea of what economic cycle the nation is in and likely what might be the next phase. There are generally two economic cycles for the United States and most other countries, which is either expansion or contraction.
By understanding what phase, the economy is in we can hopefully better position investments, our lives and other financial resources that may be impacted for better or worse.
There are three types of economic indicators you should know about.
For this article, we will be focusing on leading economic indicators.
All economic indicators boiled down are statistics and data that usually come from the government but can also come from private or non-profit companies.
Most people want to pay attention to economic indicators so that they can make smart financial decisions based likely upon where the economy is going or coming from.
There are several types of leading indicators one can look at.
-new claims for unemployment
-stock prices of indexes
-orders for durable goods
-changes in investor sentiment
Tip: Keep in mind that when it comes to stock prices it isn’t information you necessarily want to invest based upon because the time to invest has already passed once it is reported.
For instance, you buy into a stock when you see it going up. Unfortunately, you missed the opportunity to buy at a discount which might have been the prior day or prior month.
So instead… use it as an indicator of the business cycle we are headed in. Are things headed for expansion or contraction? Are there other indicators pointing the same way?
Most of us get knowledge of the indicators from the news. You often hear about how stock indexes like the S&P500 or NASDAQ performed. The news will also bring up unemployment and bond yields among a few other indicators that aren’t leading indicators such as inflation, a lagging indicator.
Another great way to get information on indicators is to go straight to the source. A lot of times this means looking at the website of one of the government bureaus. Here are a few of the sources for indicators.
-US Census Bureau will release a report online on housing starts each month.
-Department of Labor will release a report online on new unemployment claims weekly.
-Chartcraft, a private company, you can find a report on investor sentiment.
The most important reason to understand and keep up with these indicators is to make smart financial decisions. They help show where the economy is headed. This can be beneficial with managing your investments.
You will have a better understanding of what sectors of the market you may want to invest in or get defensive about. Indicators can also be beneficial in determining if it is a good time to buy a house or if you should hang on to a job.
Check some of the sources listed above on a monthly basis. Then from there, you need to interpret them.
For instance, if the yield curve inverts it can be an indication that a recession is coming. Or if the stock market falls more than 20% it can also be an indication of a recession coming.
Then there are housing starts. Which can demonstrate how builders and developers feel about the economy and the future of housing.
Economic indicators help us understand what phase the economy is in. There are three categories: leading, coincident, and lagging. Leading indicators help us get a preview of where the economy is headed. Leading indicators are important to help us make smarter financial decisions for our future.
Not everyone has the passion or time to keep up with indicators although they are an important tool. It can be good to work with a financial advisor to build a solid financial plan and utilize their financial knowledge to your benefit.
At BlackBird Finance we will help you put into place a financial plan to accelerate your financial prosperity. Get in touch to start the conversation.