Looking Back, Looking Forward
The month of January is named after the Roman god Janus, who was imagined as having two faces: one looking toward the past, the other looking toward the future. In a similar manner, economists look in both directions to better understand economic trends. But instead of two faces, they use economic measures called indicators.
The most commonly studied indicators are tracked by The Conference Board, which publishes composite indexes of leading, lagging, and coincident indicators.
Gauging the Future
Not surprisingly, leading indicators garner the most attention, because they may forecast the future direction of the economy. The Conference Board Leading Economic Index® includes 10 components: weekly hours for manufacturing workers, initial unemployment insurance claims, consumer expectations for business conditions, stock prices, credit activity, interest-rate spread between 10-year Treasury bonds and the federal funds rate, building permits, and three separate measures of manufacturers’ new orders.1 These all tend to signal potential shifts in the broader economy. For example, when manufacturers’ orders increase, the economy may be growing. Conversely, a drop in orders could signal a downturn.
Confirming the Past and Present
Lagging economic indicators can help confirm that an economic trend has occurred in the past or is already in progress. The Conference Board Lagging Economic Index® includes duration of unemployment, average prime rate, outstanding commercial and industrial loans, consumer price index for services, inventories to sales ratio, labor costs per unit of manufacturing output, and ratio of consumer installment credit to personal income.2 For example, consumers might borrow heavily during tough times, and it can take months or years to reduce balances.
Three Economic Perspectives
The Conference Board leading index began to drop in February 2020, ahead of the March–April recession (shaded area), while the lagging index dropped after the recession. Beginning in May 2020, the leading index has pointed to economic growth.
Coincident indicators, which generally move in step with the broader economy, may offer confirmation that the economy is moving in a particular direction. The Conference Board Coincident Economic Index® tracks the number of employees on nonagricultural payrolls, personal income, industrial production, and manufacturing and trade sales.3 These factors help define the current state of the economy.
Economic indicators may offer helpful clues about the direction of the economy, but economists require extensive training and experience to interpret them. It’s not wise to make investment decisions based solely on these indicators. A sound investment strategy should be based on your time frame, goals, and risk tolerance.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.