Leading economic indicators are numbers that show what will happen in the economy before it does. They try to figure out what will happen next in the business cycle. This is especially important when the economy is coming out of or heading into a recession.
Indicators that are leading, lagging, or coincide
The other two kinds of indicators are ones that come at the same time and ones that come after. During the trend, there are signs that match up. The most important coincident indicator is the number of new or lost employees each month. The Bureau of Labor Statistics comes out with the Employment Situation Summary. There are three kinds of economic indicators: those that lead, those that match, and those that lag. Lagging indicators show what has already happened.-They either agree with or disagree with what the lead indicators said would happen. For example, after a recession ends, the unemployment rate tends to go up. That's for a good reason. Even when the economy is doing better, employers are still reluctant to hire full-time workers. They wait to see if the growth is something they can count on.The Top Five Most Important Signs
There are five leading indicators that you should pay the most attention to. They are the yield curve, orders for goods that will last a long time, the stock market, orders for goods to be made, and building permits.- The yield curve shows how interest rates change over time.
- The most important thing for the average person to look at is the Treasury yield curve.
- All of the last eight recessions, in 1970, 1973, 1980, 1990, 2001, and 2008, were predicted by it.
- Before the recession of 2020, the yield curve also went the other way
Orders for Durable Goods
The durable goods orders report tells you when big-ticket items are ordered by companies. Five examples are machines, cars, and planes used for business. This is not the same as when a person buys something like a washing machine or a new car. This is important, but business orders change before the business cycle changes. Go to the most recent report on durable goods orders from the U.S. Census Bureau. For instance, when the economy gets worse, businesses put off buying expensive new equipment. To save money, they'll just keep the old machines running. When businesses start to believe in the future again, the first thing they do is buy new tools. They need to get rid of the old equipment and get ready for a rise in demand. In January 2008, orders for durable goods went down. A few months later, the Bureau of Economic Analysis said that a recession was happening in 2008. In October 2018, months before the recession of 2020, orders for durable goods began to fall. The Dow Jones Industrial Average, the S & P 500, and the Nasdaq are the most well-known stock market indices.Stock Market
The stock market is an excellent predictor of future events. The price of a company's stock shows how much money the company is expected to make. Investors look into the health of businesses and the economy all day every day. When stock prices go up, people feel better about how the economy will grow in the future. When the stock market goes down, investors rush to places they know are safe. They will sell their stocks and buy gold or 10-year Treasury notes. The crash of the Dow Jones Industrial Average on March 9, 2020, was a good sign that a recession would happen in 2020. But both the drop in the stock market and the recession that followed were directly caused by the anxiety, uncertainty, and economic problems caused by the COVID-19 outbreak. Watch out for the Dow Jones Utility Average in particular. It looks at how the stocks of 15 large utilities are doing. These companies borrow a lot of money to pay for the places where they make energy. So, their profits depend on how much interest they charge. When rates are low, they make more money, and the utility index goes up as well.Jobs in Manufacturing
How confident manufacturers are can be seen by how many jobs they have? Even though employment as a whole is a lagging indicator, factory jobs are a key leading indicator. The Bureau of Labor Statistics jobs report shows how many manufacturing jobs were added this month. When orders for a factory go up, the company needs more workers. This is good for other businesses, like transportation, retail, and the government. When companies stop hiring, it's a sign that a recession is coming.Building Permits
Building permits tell you what will happen nine months from now when a new home is being built. Most cities give out permits two to three months after the buyer signs a contract to buy a new home. That means it will take builders six to nine months to finish the new house. The U.S. Census says how many building permits are given out each month. "Permits by State-Monthly" is an Excel file that you can download. Use the "Units SA" tab to find the rate that takes into account the time of year. When permits start to go down, it's a sign that people don't want to build as many new homes. When that happens, it's usually a sign that there's something wrong with the market for used goods. Real estate and construction jobs are both important parts of the economy. When this sector gets weak, it hurts everyone. For example, this was a mistake that economists made during the recession of 2008. They thought that the crisis caused by subprime mortgages would affect only the real estate industry. As early as October 2006, the number of new home building permits was down 28% from October 2005. 12. It was a sign that the housing crisis and the global financial crisis of 2008 would happen soon.The Leading Economic Indicators Index
The U.S. Conference Board puts out a Leading Index, which is a good way to predict what will happen in the economy. If you can only look at one sign, this gives you a quick look at the situation. Since it is a combination, it won't tell you as much as the five indicators above. The Index looks at 10 important economic signs. We've already talked about five of them. These are put together with the five signs listed below. 10. These are not as good at predicting economic trends as the top five. Here are some of the reasons: This report is used by investors to forecast the monthly jobs report, but it also measures the unemployment rate. That's usually a sign of what happened before. Employers don't let people go unless they really have to. They also don't hire people back until they know for sure that the economy is getting better. The unemployment rate often keeps going up for a long time after a recession ends. ISM Index of New Orders: This is a survey of more than 400 purchasing executives in the manufacturing sector. If the number of new orders is higher than 50, both manufacturing and the economy are growing. It is a very useful sign, but if you don't have much time, you can get a similar picture from the Durable Goods Orders Report. It looks at six financial indicators, such as margin account balances, bank credit, and security repurchases. It is a good indicator of what might happen in the future if you understand the financial products behind them and how they might affect the credit industry. The Treasury yield curve can also tell the future. The information here comes from a survey of consumers. It asks what they hope to happen in the future. It shows if people think business conditions, jobs, and incomes will get better in the next six months. Most people predict what will happen in the future based on how well they are doing now. For example, even after a recession is over, a lot of people are still out of work.How to Use Forward-Looking Signs
When a new part of the business cycle starts, leading indicators are the first pieces of information about it. They happened during the old cycle, but they show what's going to happen next. Here's how to use each of the five most important signs.The Yield Curve:
Check the yield curve every month. It can turn around years before a recession happens. Because of this, you should keep an eye on it, but don't do anything until other leading indicators confirm the trend shown by the yield curve.Orders for durable goods:
Check the durable goods order report every month. It will change frequently. Most of its orders are for commercial planes, most of which are made by Boeing. Also, look at the section of the report called "Capital Orders Without Defense and Transportation." It gets rid of the difference between how many commercial and military planes are ordered.Stock Market:
There are also a lot of daily changes in the stock market. Most of it is just noise, but if the market falls more than 20%, it's important to pay attention. That's called a "bear market," and it often happens during a recession.Jobs in Manufacturing:
Every month, the Jobs Report lists jobs in manufacturing. If it keeps going down month after month, you can be sure that a recession is coming.Building Permits:
The report on building permits is also made public every month. A quick look will show you how developers feel about where housing is going in the future.Questions People Usually Ask (FAQs)
What should I do if signs of a recession show that one is coming?
There are things you can do to get ready for a recession, and many of them will help your finances no matter what is going on in the economy. Some of these things are paying down your debt, making sure your investments and retirement accounts are set up for long-term growth, and finding ways to spend less.How long do economic downturns last?
Recessions can last anywhere from a few months to a few years, but since 1945, the average length of recessions has been 11 months.When does an economic downturn turn into a depression?
You can tell the difference between a recession and a depression in a few important ways. Depressions last longer than recessions and are measured in years. Technically, the U.S. has only had one depression, which lasted 10 years and was called the Great Depression. Since then, the U.S. government has taken steps to make sure that another depression doesn't happen.