What is a Leading Economic Indicator and Why is it Important?
Often, investing terms can make you feel like you are lost in a maze of strange vocabulary. Today I thought I’d tackle one that people talk about on the news frequently.
Leading Economic Indicators
A leading economic indicator is a tracked measurement of economic activity. It’s called leading because these indicators can be used as a tool to help predict how the economy and markets may change in the future.
Why are they important
Economists look at the trends of different leading indicators to see what industries are performing well or are in decline. Leading indicators are one of many precursors as to how the economy may react in the future.
• Building Permits
o If more new houses are being built, people have money and feel confident in their current financial situation.
• Unemployment claims
o If unemployment goes down, more people have jobs.
• Inventory changes
o If inventories go down, that means that people are purchasing the goods
• Average weekly hours, manufacturing
o If weekly hours go up, that means the manufacturing plants have more orders to build
• Manufacturers’ new orders, consumer goods and materials
o More new orders means more demand
• Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
o More new orders from businesses means more manufacturing and industrial needs
• Stock prices
o Stock prices go up when consumer sentiment is high and earnings are good.
o If bankruptcies are down it means that less people are having financial issues
• Retail Sales
o People buy more retail items when they have more discretionary income
So the next time you hear a new report about the economy and they discuss leading indicators, you’ll have better idea of what they mean. Plus, you’ll look really smart at your next cocktail party!
How are you feeling about the economy at the moment?
Sharon L. Herman AAMS, ADPA is the CEO of Silver Key Wealth Management, and affiliated with LPL Financial. www.silverkeywealth.com
The opinions expressed in this material do not necessarily reflect the views of LPL Financial.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Silver Key Wealth Management, an independent investment advisor. Silver Key Wealth Management is separate entity from LPL financial.
Ms. Herman may only discuss and/or conduct transact securities business with residents of FL, MI, GA, NJ, VA, TX. www.finra.org www.sipc.org
Photo Credit: Niki Odolphie